For my clients, Risk is more than just if the stock market goes down. Risk includes the mistakes that are commonly made when it comes to buying shares online.
The same mistakes are made over and over. While these issues might be new to the individual trader, they are so common that I can almost be on automatic pilot in the delivery of my responses on how to avoid these mistakes.
So I thought I’d take the time to note them down.
7 of the most common mistakes when it comes to buying and selling shares online.
1. Hope & Pray
Just buying shares and holding them in the bottom drawer indefinitely is not a professional way of approaching investing. I call this the “Hope and Pray” method. You’ll get more enjoyment if you went to the casino and gambled on black or red rather than buying shares and stressfully watching the daily up and down fluctuations of stock prices.
Professional investors and traders adopt a strategy when it comes to buying shares online. There are various strategies that can benefit from different types of market conditions. Therefore, it is imperative to learn and understand a strategy (or multiple strategies) to be able to tactically approach the markets.
2. Trading too Small
Quite often I will hear “I’ll test the markets with a small amount of money”. This mentality is actually a set-up for failure!
Having a small amount of money and putting it into the markets is hit or miss. In fact, it adopts the Hope & Pray method mentioned above. You will either make a profit, or you will lose money. And the reality is, majority of Mum & Dad investors will lose money due to the reasons listed below. Therefore, they will walk away from the markets with the mentality that it is like gambling.
Professional investors use a small portion of their investment capital on any one trade. Now, I mean small in a percentage term, not in a dollar term.
For example; you may invest 5% of your capital on one stock, providing you with diversification. If that one stock declines and you lose value in the position, it won’t have a major impact on your overall capital base.
But let’s say you started with $1,000, as you wanted to test the waters. You buy a stock. It goes down. You lose $500. And you then have the attitude that the stock market is too Risky.
Not everyone can start with a large capital base. But understanding that one trade is not going to make you a million dollars is the first mental hurdle to overcome.
3. Taking a Tip – the Rumour Mill
I run strategies that are based on proven analytical techniques. I adopt money management rules. Establish exit points, and have a profound understanding of how the markets work. I have spent 15 years developing my skills as a professional trader.
Getting a tip from some guy I met at the pub who has a cousin that works with a guy who knows the CEO’s dog groomer, is about as helpful as an open raincoat. On the odd occasion the rumour might actually be real. But reality is that nearly all the “tips” I’ve ever heard have resulted in clients losing money.
Don’t invest directly on a tip. If you like the story, consult a professional analyst. They will weigh up the known data, consider an appropriate strategy, and establish a plan.
4. Holding too long
When stock prices get high, Greed kicks in. An investor will see a price at long-term highs and think the stock is going to go higher. Sometimes it does.
But eventually, all stock prices will stall and retrace. They never linearly trade in the one direction indefinitely. This is due to Economic influences, political influences, and market sentiment. Even the most popular companies eventually change direction.
Falling stock prices entice Anxiety, Denial, Fear and Panic. As prices begin to fall, investors think “its now a great buy”. The further it falls, they begin to deny the change in fundamentals. “It’s a great company, they’ll come back”. Eventually, they begin to panic sell, and guess what … it’s the bottom of the market.
Although we can’t pick the top of a market, we can use analytical techniques to determine if there is a change from buyer to seller influence in the stock. There will be times when these techniques falsely trigger an exit to the position. But more often than not, they will save you from greater pain of a falling stock price.
5. Not knowing how the markets actually work
There’s no reason for me to get under the bonnet of my car as I have no idea about mechanics. At the same time, I’m not going to perform surgery on my friends if they start complaining about an ailment. Why would someone who has very little knowledge about the markets expect to outperform an industry where professionals take years developing their skills and knowledge?
One of the first things you should do if you intend investing in the markets is to start educating yourself. This doesn’t mean going to University and attaining an Economics Degree. But understanding how the markets work, what strategies you can implement, and the techniques in how to analyse will provide you with the ability to manage your portfolio. Especially if you have the assistance of a professional advisor (like myself!).
6. Knowing your plan before you enter the trade
Majority of us don’t jump in the car and just drive without knowing where we are going. Even if you haven’t been to the destination before, at the very least, you will set the SatNav/GPS or consult a map and plan out your route.
Most beginner traders and investors will simply buy stocks and then start making decisions in reaction to what the stock price does. If it goes up after they buy, then they positively reinforce poor decision making and set themselves up for an even greater failure later on. If it goes down, then the stock market is too risky!
Before you enter a position, you must conduct your research (or consult a professional for advise), and establish a plan on how you are going to make money from the trade. Remember the Hope & Pray method? It just doesn’t work. How are you going to make money out of a trade if you don’t know how?
Reality with the markets is that we don’t know what they are going to do in the future. We weigh up the given information, establish probabilities of price movements, set our strategy and plan and then must react when price action dictates.
Deviating from your plan whilst in the middle of the trade can be just as fraught with danger as not having a plan at all. Too often I see traders wishing they hadn’t changed their approach. If you don’t have confidence in your plan or strategies, then you need to re-evaluate what you are doing.
7. Placing incorrect orders
Finally, the process of placing your buy orders online can be very confusing for a beginner. A lot of traders will panic at clicking the buy or sell button, afraid that they may wipe out their account, or even worse, go into Margin and owe the broker money.
There is an easy solution to this. Practice and double check.
Most online trading platforms and brokerage systems have Demonstration accounts, and videos or support to help explain how to use the systems. These work exactly as the Live accounts, but don’t physically place orders in the markets. Therefore, you can make the same decisions, establish the same strategies and implement the same orders. In essence, they are a “Paper Trade” or pretend trade.
Placing your orders correctly is just practice. When you don’t know how to use something, it can be a bit hit and miss. But after you become familiar with it, your order placing will become second nature. Just don’t become too blasé as this is where you can make mistakes. I always double check my orders before I click the submit button.
Well, I hope these seven tips on how to buy shares online help you in establishing a better approach to investing in the markets. The stock market can easily be learnt by anyone. Surely, if I can successfully manage funds, then anyone can! It is not an entity that you should fear, or pass blame.
At the end of the day, if you have adopted safe and sound money management rules, have a good understanding of how the markets work and the strategies that you can adopt, with a little help from a professional advisor, you too can successfully invest in the stock market.
The Seven biggest mistakes when buying and selling Shares Online is one article in the “How to Buy Shares Online” series.
Matthew Brown – US Stocks & Options specialist
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973
If you would like to learn more about the strategies you can use to profit from any type of market direction, visit www.australianinvestmenteducation.com.au or you can contact Matthew on firstname.lastname@example.org
Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.