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Many investors are entering the stock market without the knowledge and mental capacities which are required to operate in the market. This way of thinking and acting often results in severe losses.
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Nailah Wright - Ways to Lose Money in the Stock Market Many investors are entering the stock market without the knowledge and mental capacities which are required to operate in the market. This way of thinking and acting often results in severe losses. We have gathered several items that will help experienced investors to verify they do not make critical mistakes and to newcomers who plan to enter the capital markets to avoid them in advance. 1. Think that a low share price represents a cheap stock - Investors sometimes think that a stock that is traded in 1$ is cheaper than one traded for 100$ and forget that a comparison of stock prices is meaningless. In fact, the stock represents a partial ownership in the company, so the share price is a function of its market value of shares issued capital; issued capital is an arbitrary number that does not represent the value of the company. 2. Invest according to recommendations and rumors only - Stock market investment is a complex issue. Some investors have a tendency to blindly go after various recommendations and rumors, often from unreliable sources. Unless the investor checks the background behind the recommendation and its viability they should not rely on these rumors as they might lead them to investment traps. Investors that do not have time to do their own research should outsource their portfolio management to a professional. We do feel that even if you decide to manage your assets by someone else, you still need to have the capability to monitor them and understand the decisions they are taking with your money (need we remind you Madoff).
3. Never admit that you have made a mistake - Investors tend not to admit their mistake. As a result, they often remain in a position which they should stay, to prove to themselves that the investment they have made is a wise one. Sometimes the most intelligent decision is to know when to admit a mistake and cut your losses. 4. Start investing before you formalized a strategy - Before investing in the capital market each investor must formulate his personal investment strategy. Correct investment strategy will include the following key elements: amount of investment Once your basic strategy is ready - the likelihood that you will make hasty decisions is lower as you have to think before and see if it is aligned with your initial strategy and goals. 5. Disregard your sensitivity to risk - Many investors believe the volatility in the capital market will not affect them so they invest a high portion of their portfolio in relatively dangerous channels. In reality, many investors tend to panic when the market conditions changes and make irrational and excessive decisions, whereas if they would have been aware to their tendency to stress out, they would have invested in safe investment tools (such as bonds etc) 6. Do not diversify your portfolio - One of the key principles of capital market investment is diversification. A portfolio consists of a number of different investment tools and channels carrying significantly lower risk compared with a portfolio based on a single share, or with a number of shares with a high correlation between them (for example - all real estate in US). A portfolio should be comprised of at least 10 to 15 lines. On the other hand, you should not vary too much, so you can keep track of the changes effectively (just imaging yourself trying to manage a portfolio with 100 separate line items...). 7. Ignore the importance of fees - The default of most investors is to invest through the bank. It's not necessarily the best solution. Comparison of fees charged by banks and investment firms are backed up various amounts investors can save considerable wasted on excessive fees. This applies for any kind of fee you are paying - the mutual fund manager, your pension fund manager etc. Always negotiate and try to reduce the fees - you will be surprised with the results. 8. Attribute great importance to the economic press - Investors tend to attribute great importance to the economic press about their investments so they devote much time to written analysis; The most significant information is not delivered in the economic press, nor does it appear on time (usually due to information leakage). Do bear in mind that the goal of the press is to sell more papers and not to support the investor's decisions.
