Recently, it is clear for everyone to see that huge losses have been inflicted upon the stock market. This has resulted in an increase in a number of people (novice traders) opening brokerage accounts, with the aim of taking advantage of stocks whilst they are low. However this could lead to these people making CRITICAL novice errors.
If you are a novice trader or just want to be aware of the 10 CRITICAL errors beginners make then read on...
1. Lack of stop loss awareness - this means that when they enter a trade, and further losses are inflicted to the stock, it is unlikely they will be able to cut these losses short. If you are a novice trader, find out what stop losses are and use them!
2. Its easy for beginner traders to accidentally execute trades incorrectly - because they are new to ordering a stock, it is easy to mistype information/numbers or click on the wrong box (yes I have shorted a trade when meaning to go long before!). Making a few practice trades first is highly recommended.
3. No strategies - as they are new to the stock market, they are unlikely to have developed, let alone tested, any successful strategies. If they are planning to buy multiple stocks frequently, this could end up in them losing a lot of money quickly.
4. Little knowledge about stock market psychology - meaning that they are unaware of the ridiculous/senseless/greedy/fearful actions that a losing trades can make traders do! Remember 'traders that lose cut their winnings short and let their losses run!’ this is an easy psychological state to get into after having a few losing trades.
5. Little knowledge about stock liquidity - meaning that traders could buy a cheap share and not realise that liquidity is low, which could result in them suffering from sharp price movements and not being able to get rid of the stock when they want to!
6. Not knowing the difference between limit & market orders - in volatile times like the last few weeks, depending on how much capital is invested, a the difference between a limit and market order could mean you start the trade with a significant loss.
7. Many people who invest for the first time do not know when to exit a trade - and more importantly do not know ho much money they want to make from a trade. This could result in the investor getting impatient and exiting a trade at completely the wrong time.
8. New traders on the stock market often follow tips from their mates or tips from people who they think have stock market knowledge - this can so easily lead to disaster, do you own research or seek professional advice! How many times have you taken a tip on the horses and lost? (I know I've done it!)
9. Novice traders do not research a companies key financial information, they often just go on big company names they know - this means they do not know how much a company is forecasted to grow, how much debt its in etc. This stuff is worth knowing if you want to make a trade on which way the share price is going to go!
10. New traders will often sign up to any brokerage account - this means they will not have taken into account if a broker charges inactivity fees for not trading, not ideal if their plan is to buy and hold a small number of stock for months and months!
So there you go guys, take all these points into account when entering the stock market and I would definitely recommend going on a stock market course to develop some strategies.
NB. I don’t want to put you off trading but I do want to put you off losing your hard earned money!
Matthew Merriman, has experienced winning and losing in the stock market and now makes a decent living out of it. His website http://www.sharesexplained.com
covers all the basics (and more) of the stock market and encourages new investors to trade successfully and safely.
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