Today we are going to be talking about stock market beginner mistakes that you might have probably made already. These investing errors or mistakes are very common to most beginners today. And in my own opinion, these mistakes are what separate successful investors from unsuccessful ones.
The majority of these stock market mistakes are as a result of how we are wired and how we think, which makes it so likely to make these mistakes, especially as a beginner at it, but I hope that by identifying them today, you can now figure out how to not do these things and begin to approach the stock market differently like the successful ones do.
If we can’t forecast market behavior, we must at the very least predict and regulate our own. So that’s all there is to it. This essentially describes the origins of the seven fatal mistakes. Basically, these mistakes stem from the situations that most people find themselves in as a result of their out-of-control conduct, emotions, and environment.
Since the stock market is a very unpredictable market, if you approach it with an unstable emotion or behaviour, it can be dangerous.
Here are the common stock market beginner mistakes that must be avoided when investing in stocks.
1. Confirmation Bias
Confirmation bias is basically seeking confirmation of your own beliefs. This is somebody who is not interested or has actually shied away from the opinions of other people.
Okay, this is something you’ll notice a lot more of these days because it’s so simple to start your own online group. And because you’re being picky with your media consumption, this is basically where you’ll hear exactly what you want to hear. You just watch or listen to media that confirms your decision. This is referred to as confirmation bias.
Because you’re just listening to what you want to hear and dismissing other people’s perspectives, all of the skewed news out there is creating an echo chamber. People will only listen to, watch, or read exactly what they want to hear, which means they are not getting all of the facts. The news has gotten increasingly slanted, so you may be very careful about your media consumption.
In other words, you place a higher value on information that supports your judgment and a lower value on information that contradicts it. To make solid and better decisions as an investor, you must learn to look at both sides, the advantages and negatives.
Also Read: 21 Best Forex Brokers UK Reviews 2022
2. Endowment effect
As an investor, you must be very careful. The endowment effect refers to an emotional bias that causes individuals to value an owned object higher, often irrationally, than its market value. This is another mistake that is made by a lot of investors today.
Many fell in love with an investment to the point that they don’t want to part ways with it even if it drops in market value. You should always be willing to part ways with your investment if it’s time to part ways and if it is for the best.
A simple solution is here to get qualified people that can give you unbiased opinions – opinions that are not skewed by people’s personal feelings or opinions. Make sure you’re seeking out qualified opinions that either confirm or contradict what it is that you think no matter what and that you’re weighing each opinion equally.
3. Acquire or sell stocks at the wrong time.
You buy things at the top of the market because you’re celebrating that your friends are making money investing in this certain sector or this certain stock.
This is yet another fatal investing mistake made by novice investors who lack sufficient market analysis or investing experience and believe that the current market trend will always continue in the same direction. Having the conviction that the good times will continue to roll, or that the terrible times will never stop if you’re having bad days. This forces you to do exactly the opposite of what you should be doing.
If you go out and ask anyone for investment advice, the majority of individuals will tell you to buy low and sell high. Usually, you think they’re just giving you basic advice, but the truth is that this is the best advice anyone could ever give you because if you believe the current trend will continue, you’ll buy high and sell low.
Also, keep in mind that prior performance does not guarantee a similar outcome, so just because you’re having a wonderful time today doesn’t imply it will be the same tomorrow; this may sound harsh, but it is true.
The important thing to remember is that you want to buy low and sell high, and if you follow the current trend, you’ll be doing the exact opposite. You’ll be following the herd and participating in the herd mentality, which might put you in a bad spot as an investor.
4. Overconfidence / Competence
Overconfidence is regarded as an overestimation of one’s own abilities, which leads to a lack of diversification, too much money invested in a single stock, or single sector.
Overconfidence in your own abilities or competence might put you in a bad position as an investor. Essentially, we are designed to be overconfident as humans. Another aspect of this is exaggerating the abilities of someone you regard as a mentor.
If you believe so much in someone, it might make you buy too much into what they are saying. If you think that they have abilities beyond those of the average person, you may also be in for a bad time as an investor.
You need to understand that no matter what, you can’t accurately predict the future. Once you understand this, you are at an advantage as an investor.
5. Speculating the market like a gambler
Many have the desire to hit a homerun and just slam it out of the park. They love the idea of winning and would want to make it big, seeing gambling as a way out.
This is what is seen to be common out there today and it is one of the major reason many lose big or even lose it all. Many people out there that are speculating when they think that they’re investing and they’re calling themselves investor and it’s even worse because many don’t even know there is a difference between investing and speculating.
Bottom Line: Understand that a speculator is not an investor. If you want to be an investor, you need to understand that investing is a marathon and not a sprint like most people are taking it to be.
Making speculative investments with no tangible or thorough market analysis is a big mistake made by most investors making speculative bets instead of making investments. Another way to know you are a gambler is when you are risking more than you can afford to lose, this is also an unintelligent speculation.
6. Hometown Bias
As humans, we have the natural tendency to stay where it is comfortable or seems to be safe. This is why many investors will always prefer to stay in the market of their country. For instance, many investors in the United States largely invest solely in US stocks or invest only in one sector of expertise.
Honestly, this may not be a bad idea, but the down side to this is that, you won’t be able to diversify. For instance, the global equity market, of which 49% is made up of US stocks, and 51% of non-US stocks. So when someone invests 100% of their money in only US stocks, which covers about 49% of the entire market, that means you will be left out of the remaining 51% of the total global market.
The solution is to diversify, so if you’re investing in US stocks, consider investing in stocks from other countries as well; if you’re solely invested in your employer’s stock, consider diversifying; and if you’re only investing in tech stocks because you work for one or because it’s the sector you’re familiar with, try to diversify in other stock markets outside of tech.
This is basically what happened after the stock market crash of 2008. And as a result of that, many stayed out of the market and missed the entire 8 year market bull run that followed the bear market.
Many got scared away as they were trying to avoid loss, and as a result, they put their money in savings and checking accounts earning a fraction of a percent of interest, which was not keeping up with inflation, and as a result, they still lose money as well.
The truth is that bad experiences stick with us longer than positive ones. It’s just how our brains work, and market corrections are unavoidable. You must be aware of yourself. You should learn about market corrections and bear markets.
To summarize, the following are some obvious pitfalls to avoid when entering the stock market. When shortlisting a company, keep a long-term perspective in mind and conduct thorough due diligence.
Do not invest in a company simply because a stock market guru has invested in it or it is currently providing high returns. Once you’ve decided on a company with solid fundamentals, invest and give your investments enough time to pay off. Stay patient, be prudent, and have fun on the journey!