Many new stock traders lose confidence and money when they first start trading on their own. By sidestepping common mistakes, new investors can avoid learning these lessons the hard way.
1. Believing An IPO ‘Can’t Miss’
Unfortunately, there was a whole class of first-time investors that got burned on the infamous Facebook Inc IPO. Facebook’s IPO price had very little to do with the number of users the company had. Many buyers learned through this event that popular companies aren’t always good investments.
2. Catching A Falling Knife
Momentum plays a powerful role in stock price movement. Just because a stock price is low doesn’t mean it can’t go lower. Sometimes it’s better to wait until a bottom has been clearly established before buying, even if that means you don’t buy at the exact lowest price.
3. Riding Losers
Stubbornness and pride are two traits that will do nothing but cost you money in the stock market. Nobody likes to admit they were wrong, but there is no sense in holding onto a bad investment and watching your money bleed away. Nobody’s perfect; just sell and move on.
4. Averaging Down
A very specific type of stubbornness related to bad investments is the idea of buying more stock at a lower price to lower the overall average price per share of the entire position. If you still believe that the stock is a good investment even after the share price has dropped, averaging down is a great trade to make. However, averaging down only compounds losses when a stock has fallen for good reason.
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