Stock trading is a very risky game. Novice investors are many times disappointed when the purchase value of their stocks decreases. The common mistakes that investors commit are averaging positions, over-trading to recover losses trying to outsmart the market, and focusing too much on hot tips, etc.
Learn to self-trade
Nowadays, it is really easy to get a lot of tips from friends, the TV, online websites on trading but very few of them ever work. Hence the best way to succeed is to learn to self-trade. You need to work on charts, learn and understand the structures, patterns, and behavior then put down your trades. Many investors or traders don’t want to put in that effort in gaining knowledge and so their trades underperform and they lose money without any research and study.
Diversify, but don’t over-diversify
To have a diversified portfolio means to include various industries from different sectors and market capitalizations that react differently from each other. It helps reduce risk in the long term and to minimizes the non-market risk.
Non-market risk can be controlled by the investor, unlike market risk. It is directly linked to the company’s performance, whereas market risk is linked to macro events like natural disasters, recessions, changes in interest rate, change in government policies, etc.
Invest in good companies
Invest in good companies that have a strong business model and are profitable. These companies should be earning recurring profits and have a dominant market position and should be well seasoned. These companies make good returns on equity and with lesser debt on their books, and strong cash flows, they tend to repay the shareholders with dividends and bonus shares. Getting a good price for a good company is quite tricky, you may overpay for it. A company is a bad investment if you end up paying too much for it and that’s the most common way people tend to lose money.
Focus on being right
Finally, investing with your emotions and instincts is not always right, because that might lead to costly mistakes and bad decisions. Investment decisions must be made with a rational mind and practicality.
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