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Everybody wants to win in the stock market, yet 95 percent of traders lose money. Why?
investing in the stock market is not an easy task. If you invest carefully, you can increase your wealth by leaps and bounds. But just the same, there are also a thousand ways to lose your hard-earned money in trading. As investors, our goal is to avoid pitfalls and invest wisely.
here are the five common mistakes (made by most traders) to avoid in order to be successful in the stock market.
short term or long term: which is correct?
When it comes to investing in the stock market, most investors still think of it as a place to make short-term gains. it is rather the opposite. A long-term focus is a great way to build wealth through stock investing, but short-term goals can lead to substantial losses.
investing in the market for the long term allows investors to overcome market volatility and generate a substantial profit. Investing in the stock market requires careful planning, knowledge, and the ability to stay focused on your goal. therefore, investors should not expect overnight gains.
All three of the 3 ms of trading: mindset, method, and money management are equally important to success in stock trading. without mastering these three ms, one cannot last long. it takes a rational mindset to make unbiased decisions, an approach or method, and efficient money management to know when and where to put it.
gain some knowledge of the market
trying to trade the market without knowing it is like jumping into the sea without learning to swim.
Before you invest, learn about the market and the economy. most investors jump into the market without understanding it, which leads to wrong investment decisions.
The economy and the market are intimately related and one will affect the other. Understanding business cycles will help you understand when stock prices will go down (or up). you can use a short-term drop in the market to plan your entry. Similarly, when the market is falling, and if you have already invested, it is essential to know when the drawdown is temporary and wait for the market to rise again.
knowledge of the economy and the market will help you stay focused and avoid mistakes caused by panic.
avoid frequent buying and selling
Most investors lose money in the stock market because they lack patience. Instead of looking for long-term profits, they follow day trading strategies. During 1996 and 2016, the average investor earned 3.98% per year when the return of the S&P 500 Index was 10.16%. the reason is simple. Investors often practice frequent buying and selling for short-term gains. The rule of thumb for long-term gains in the market is to follow a proven investment method and select stocks based on sound fundamental analysis.
stock selection based on sound fundamentals
We tend to base our investment decision on a stock’s past performance. however, it is not the best approach as the fundamentals of the company may change during the period. therefore, it is risky to buy shares of companies based solely on historical data. Investors should incorporate fundamental analysis into their investment strategy.
one should compare a company’s stock price, p/e ratio and fundamentals with its peers while investing.
The p/e (price-to-earnings) ratio is a critical determinant that tells you whether a stock is overvalued or undervalued. Comparing the p/e ratio will give you a clear idea of how expensive or cheap the stock is and the company’s ability to make a profit.
don’t let emotions guide your investment decisions
As investors, we are not free from emotional bias. Sometimes investors get attached to a stock and ignore the changing fundamentals. they remain decision biased and don’t come out at the right time.
In addition, various adverse events may affect the market. it is important to analyze how different events can affect the performance of the company’s stock while investing.
don’t rush to book profits
Investors sometimes get carried away by the smallest market news and rush to book to make a profit. But when you plan to invest for the long term, selling a good stock for a small profit is the worst investment mistake. Investors must avoid costly mistakes if they want to build wealth through stock market investing.
Investors sometimes follow other investors and invest in stocks that others are investing in without regard to fundamentals. this is called herd mentality, which refers to following a group without evaluating available information about the underlying action. one should carefully avoid jumping on the bandwagon if one wants to last long in the stock market.
how to deal with losses in the market
Despite one’s best efforts, losses happen and losses are always hard to deal with. but when it happens, investors need to recognize it and deal with it.
Here are some tips to help you deal with stock market losses.
Accept the loss: When you have a loss, always acknowledge it. don’t try to suppress it or put it aside. The sooner you accept the loss, the sooner you can take control of your trade.
Take a break: It is necessary to take a break to discover what is wrong with your investment strategy. Review your strategy and the actions you have chosen. did you take a lot of risk? Or did you time the market wrong? Some traders have a habit of writing down profit and loss trades to compare the note later and adjust their strategy.
make a better plan: evaluate your strategy and determine the factors that could reverse the trading position. experienced traders will reverse their position when conditions allow and even take profit to cover their losses.
Get Inspired: Losses are hard to swallow, but put your losses in perspective. use the loss as an opportunity to learn something new and develop new skills. think like an athlete. they get inspired when they find a weakness in the game and come back stronger.
finally, return to the game. a mistake or a loss does not define your value. so don’t let that put you off. come back with a better strategy.
Are you interested in investing in the stock market but don’t know where to start?
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