The stock market has grown in popularity as an investment alternative.
The global shutdown as a result of the pandemic, plus the issuance of stimulus checks from the Federal Reserve, meant a lot of people with time and money on their hands started turning their attention to the stock market for the first time.
To the untrained eye, the stock market can look like a cash mill where stocks only go up.
However, seasoned investors know that the market is highly unpredictable and with numerous factors impacting on the performance of individual stocks. The influx of newbies into the market has seen many people make terrible investment choices and getting burnt in the process.
A key to successful investing is having a proper understanding of the risks involved.
As a beginner in the stock market, it is important to have a full picture of the risk before ‘going all-in’. There are different types of risk - market, liquidity, equity - all of which have an effect on the price movement of stocks.
Having an understanding of the risks involved would help you make more effective investment decisions and allow you to position your trades appropriately.
In a somewhat complicated venture like stock market investing, it is not out of place to seek advice from more knowledgeable people.
The problem is that most newbies take this advice on a face level and swallow it hook, line and sinker. They do not bother to carry out their analysis and background checks. The explosion of so-called finance gurus on social media is a direct fall-out of this misnomer.
A lot of people now get their investment advice from social media, which can be misleading and laced with ulterior motives. As a beginner, you have to develop the capacity to search and pick out stocks that would suit your portfolio.
Learn how to perform technical and fundamental analysis.
Understand how metrics such as P/E ratio, ROA, ROE, and DTI ratio can help you value a stock.
Also learn how to use technical tools such as moving averages, Fibonacci retracements, MACD Histogram, and RSI indicators to choose stocks, plus time your entry and exit into/from positions in the stock market.
Due diligence is the act of carrying out a comprehensive appraisal of a business to ascertain its financial status and determine if it is worth investing in.
Due diligence uses a variety of metrics such as market capitalization, liquidity, earnings, guidance, analysts’ ratings, and technical analysis - to determine if a stock is a good investment.
Not conducting due diligence is akin to gambling and increases your probability of incurring losses. You are also susceptible to knee-jerk reactions because you have no underlying reason for investing in a particular stock.
A lot of people invest in stocks that are popular or receive the most mentions on social media.
As a result, they pass up opportunities in lesser-known stocks which have the potential for high returns. For example, while most people are focused on technology stocks, small-cap stocks also offer opportunities for huge gains.
Also, when you invest in popular stocks, you are inadvertently doing what everyone else is doing. Such an approach severely limits how well your portfolio performs since your investment decision moves in tandem with everyone else
Beginners are often lured into following the crowd.
However, seasoned investors know that the biggest payouts happen when you take a contrarian view of the market. Beginners often make the mistake of buying when everyone else is buying and selling when everyone is doing so.
This would only keep you running in circles with no reasonable gains to your portfolio. It also happens when due diligence has not been conducted.
When the market appears to be moving in a certain direction, ask yourself why is this stock moving? Is it a knee-jerk reaction or fundamentally based? Questions like this help to clear the dust and clarify your investment choices.
Risk appetite is simply defined as your ability to absorb risk.
Everyone has a different threshold when it comes to risk. While some have a high-risk appetite, others are risk-averse. Risk appetite is a function of knowledge and capital.
A common mistake that beginners make is assuming that everyone has the same level of risk. It is important to understand yourself and know your risk threshold. This would determine which type of stocks you would want to invest in, and how aggressive or conservative your investment approach is.
Portfolio restructuring and asset allocation is a risk management strategy in stock investing.
A balanced portfolio acts as a hedge in the market because the assets are diversified across sectors which lower the risk of loss. One mistake beginners make is not properly structuring their portfolios.
Investments are concentrated in particular sectors, with some stocks having a huge proportion of their portfolio. As such, when those sectors or stocks suffer huge declines, this drags their portfolio downwards.
Mistakes are a good way to learn, but it is much better to learn from the mistakes of others.
Beginners make mistakes because they do not have access to adequate information or do not have the patience to conduct thorough research. Since you are putting your money at risk, then it is worthwhile that you think of ways of how to preserve your capital.
As such, beginners should expose themselves to as many learning resources as possible. Take baby steps, not quantum leaps. Write down your investment moves and evaluate them constantly. Identify areas you came up short and improve on them.
Photo by Annie Spratt on Unsplash
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