Trading in the stock market is one way to earn very quick and huge profits. However, it also brings with it huge amounts of risk. If it’s not done properly and responsibly, traders, irregardless of experienced ones or new ones, commit some very common mistakes in buying and selling stock. Most of the time, because of the lack or insufficient experience, newbies are more prone in committing such mistakes that may result to huge losses. Here are some of the most common mistakes that traders make in buying and selling stocks.
1. Chasing prices higher. As soon as you see a stock go up, how do you feel? Most of the time, you either feel you’re left behind, or you feel a chance has slipped away. You imagine yourself having that stock and now is supposed to be enjoying your profits. What will happen next is that you will chase such stock at higher levels. There are times that this will pull off but in most cases, it won’t. After you chased it high, the next thing that will happen is that the price will go back down because those who entered early will take their profits.
2. Buying at very small amounts. Commission rates can get very costly. There are fixed rates that you’ll have to pay for every transaction irregardless of how huge or small your trade is. For example, if the exchange charges a fixed rate of $0.50 cents for every time you buy on top of the other fees and commission rates. If you buy 100 shares at $1 each, you’ll pay $100.50 plus the other fees. If you buy 1,000 shares at $1 each, then you’ll pay $1000.05 plus the other fees. Just assume that the other fees is worth 0.5 percent of the total transaction then for the 100 shares that you bought, you’ll be paying P100.55 while for the 1000 shares that you bought, you’ll be paying P1005.05. Is it a big deal? Yes it is. If the price of the stock went up by 5 percent, from $100, your investment will now be $105.55 but your $1,000 will now be $1,055.50. Assuming that you have an exit fee of another 0.5 percent, once you sell your 100 shares, you’ll pocket $104.98 but your 1,000 shares will give you $1044.80. It doesn’t sound much as you’d earn basically the same 5 percent irregardless of the number of shares that you bought but think about this, if you buy 1,000 shares at an increments of 100 shares each, you’ll end up paying a fixed interest rate of $5 instead of only $0.50 for a single transaction. A $4.50 fee can make a lot of difference already.
3. Putting everything in a single stock. Some people buy a single stock and put all their money in it thinking about earning some 100 percent or even higher returns from it. Dead wrong. The volatility of the stock market keeps most, or in fact, all stocks from going straight to 100 percent in just a matter of days. Though it is true that some stocks go up that fast, they are either hidden gems, stocks that have god fundamentals but are not yet noticed by most traders, or they’re simply being jockeyed or being played by huge brokers. If you put everything in a single stock, there is a huge risk of you loosing big. If the stock goes down, you get stuck and you can’t find anyways of regaining your losses except by waiting for the price of such stock to go back up. As they say, don’t put all your eggs in a single basket.
4. Getting too emotional. This is basically the main cause or the biggest reason why most traders make mistakes in trading. Greed and fear are emotions that must be controlled and ideally, must not be involved in making decisions. If a stock price go up fast, you may have the tendency to get greedy and jump into the ride. That normally result in whipsaws or the price go back down and you’re left on top holding losses. On the other hand, if the stock prices go down fast, you may have the tendency to panic and sell your positions quick. This can hit you in two general ways. First, is the reverse whipsaw or exiting at a low price and the price bounced back up. Second, you may end up selling at a loss. Who won’t be scared in seeing their portfolio go down helplessly? But don’t let your fear get the most of you. In most cases, when the market is down or when stock prices are down, it is on sale or bargain and you can get them cheap. What goes up normally goes back down, and what goes down always bounces back up so just relax and let the market act as it will.