Mistakes that Equity Investors Make

Thursday, November 1, 2012

Mistakes that Equity Investors Make

Majority of the people think that equity trading is the simplest way to earn euphoric returns.  Far from it, I think it is the easiest way to lose money. The age old Wall Street adage clearly reinstates the fact that the easiest way to earn a small fortune in the market is to have a large fortune. 

Here we have discussed 6 undisciplined ways of equity trading that lead to losses. Be diligent or the market will wipe you out. 

Being an Action Junkie

Some equity investors consider stock market as a sport. They are not interested in money - it is perhaps, like an action for them. It’s fair enough if you can afford it.  But for most people, money matters, so know the reason why you are investing.

Even if the trading is speculative, vouch a sound reason for it. Maybe the company has launched a new cancer drug, while the stock is perilous, could be a star stock if it works.   However, the stock is in an uptrend and breaking new highs or insiders are loading it up. 

Whatever the reason is it is necessary to understand why you are banking on the stock and what the risks are. Don’t invest in a stock because your brother in law is talking about it and drives a hot new Ferrari. 
It is the simple and effective rule to be a part of the game. If you are able to maintain discipline, you’ve mastered the art of equity trading- one that most of the pros are unable to learn.

Remember the 4 percent rule

The Oxford Club suggests one should not invest more than 4% of capital in one single stock. If the stock drops and hits the typical 25% stop loss, then most one can lose on any position is $1,000.

If you have $200,000 portfolio and invest $5000 in the stock market that falls 25%, you will lose $1250. That’s the loss one can easily make up with any decent trade. But if you start losing 10% or 20% of the capital on a single trade, that’s going to be too difficult to restore the normal position. 

Take Emotions out of Stride

If you place the stop order, then it will automatically allow you to sell the stock when it reaches a particular level. The best part is to remove emotions from the decision. 

If the stop order is implemented, the shares will be sold as they hit the price level where you place the stop order. You don’t need to care why stock hit the rock bottom price. You can buy the stock again if you still like it. But most of the times if the stock is declining- it’s for the good reason- even if it’s not apparent, on the first go. 

It’s simple to rationalize why you should cling on to a stock when it’s hitting all time low. Using the stop loss can help you to make a clean break; instead of extending the agony. 

Not understanding the Market Phase

It is necessary to understand what phase of market we are in- whether the market is going in a northward position or moving towards south. In trending phase, you buy stocks that are weak and sell stocks that are in furore. 

Traders who don’t understand the intricacies of the stock market end up using the wrong indicators in the wrong market. Continuing the metaphor, trading in the market is like a blind man having stick support.

The investor need to be aware of the market and be extremely flexible to the changing scenario of the market. It is backed by the technical indicators confirming the trend of the market. Undisciplined traders, blindfolded by ego forget which phase of market they are in.

Trading in the first half hour of the session

The first half an hour of the trading is driven by sentiments, affected by global movements and hangover of the previous trading session. Above all, this is the period used by the market to lure the novice shareholders that might be opposite to the real trend that may emerge later in the day.

Most of the pro investors watch the market on the first half of the day and then study the intra day patterns and any trading breakouts. 

No monitoring of portfolio

We are living in a global world, and any important happening has an impact on our stock market. Hence, it is necessary to monitor the portfolio and add desired changes to it. If an individual is unable to review the portfolio due to time constraint or lack of knowledge, he should take assistance of his financial advisor

Hoping for a miracle to bail you out is not going to work. You need to learn discipline and strategies of the stock market. 

Author: Christina Maria

For more information on market conditions, and instant loans, visit my site personal loans Melbourne. 

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