7 Investing/Trading Mistakes Beginners Should Avoid. If You Know Nothing, Start Here.
Interested in making a stock market investment? Now is an interesting time to enter the world of beginner trading. And, recent reports show that “fearless millennials” are cashing in on stocks as older generations cash out amid uncertainty.
Understanding the ins and outs of the best trading platforms is only the beginning of a lucrative dip into the world of investing and trading. Follow our brief guide to investing for dummies and then take a look at seven of the top stock market investment mistakes to avoid as you get started.
Investing for Dummies: A Beginner’s Guide to Investing Terms
Want to know all about beginner trading? Here are some of the most common terms you’ll need to understand in order to enter the rough and tumble world of trading.
Stocks: As the name might suggest, a stock market is a place where people buy and sell stocks. Stocks are small shares or pieces of ownership of a company. Beginner investors should invest in stocks as part of a long-term trading plan as they’re pretty volatile and can go up and down in price pretty rapidly.
Bonds: Bonds are debts issued by corporations or governments. Instead of investing your money into a stock that essentially buys you a small share of the company, you’re investing your money as a loan to the bond issuer. Investing in government bonds is less risky than investing in corporate bonds.
Mutual Funds: These are a collection of stocks, bonds, and other assets. Because they’re a collection, they’re usually managed by financial professionals. And, sometimes they’re index funds, which means they’re performance is directly related to the market index. These aren’t traded on the stock market; instead, you’ll have to work with an investment company.
Exchange-Traded Funds: According to Investopedia, ETFs are similar to mutual funds; however, they are listed on exchanges, and ETF shares trade throughout the day just like ordinary stocks. And, they offer low expense ratios and fewer broker commissions than buying the stocks individually.
Stock Market Investment Mistakes to Avoid
1. Don’t Buy Popular Stocks Immediately
If you’re seeing news about a super popular stock floating around social media, it’s likely too late to invest and make a profit. If it’s news right now, the moment has passed to really cash in on the price changes. One finance professor but it best, noting that “a stock’s value to you is what it will earn in the future, not the past.”
2. Don’t Forget to Diversify Your Portfolio
Having a bunch of different stocks in your portfolio is different than having stocks in different industries and companies that respond differently to unique economic changes. Buying exchange-traded funds is a great way to combat this. But, if you’re going at it alone, look for stocks across a broad variety of different industries with different regulations, cash flow, and customers.
3. Don’t Trade Too Often
Perhaps one o the biggest mistakes that beginner investors make is trading too fast and too often. Avoid making emotional decisions and realize that trading and investing is a long-term game. And, trading too often will actually cost you more in the long-run. If you sell within a year, your profit from the sale is actually taxed as regular income, which is a much higher tax rate than the long-term capital gain rates.
4. Don’t Forget About Dividends
Shareholders get paid out differently than options holders do. And, it’s important to do your research when looking for companies and stocks to invest in. Options don’t always entitle you to dividend payments, but rather, a dividend payment to shareholders is made in shares rather than as cash. And, stock dividends aren’t taxed until the shares granted are sold by their owner.
5. Don’t Trade Against Dominant Trends
Any experienced trader will tell you that one of the biggest mistakes amateur traders make is trading against dominant trends. FX Street notes that to avoid this, you should look at the impulse and the correction phases of a trend. “The impulsive environment is the movement in the direction of the larger trend. These movements are typically large in price movement but short in duration,” they note. Trade with the larger trend and avoid risky moves against it.
6. Don’t Become Too Rigid with Your Inventory
Avoid falling in love with your inventory! One of the biggest mistakes to avoid as a beginner investor is to never become too rigid with your inventory. Don’t become too tied to one particular business or business model. Instead, view your stocks as mere inventory and buy and sell accordingly.
7. Don’t Average Down
Some financial advisors might tell you to average down; this refers to the strategy of purchasing additional shares of a previously stock after the price has dropped further. The goal? To decrease the overall average price for which you purchase and own the stock, thereby reducing your cost basis. However, it’s actually better to average up at times.
Investing in Your Financial Future
If trading still sounds a bit confusing then there is one thing you can do to invest in your financial future without worrying about stocks and bonds. And, it doesn’t require you to move cash around, alter your budget, or really do much of anything that you wouldn’t normally do.
Signing up for the Cheese debit card ensures that you’ll not only be able to unlock savings in the form of $0 in overdraft fees and other standard charges, but it also ensures that you’ll be able to unlock the kind of high savings you only typically see with a high-yield savings account and cashback.