As more and more American households invest their money into the stock market, it seems as though more and more American households lose money in the market. Whether your only exposure to the ups and downs of the stock market is in a 401k, or you are a “day trader” who lives and dies by the sword, it is crucial for your family to have some extent of its wealth in the market.
You may be asking yourself, Why is it crucial for me to invest in the stock market if so many people are losing their shirts? The answer is simple; with no risk there is no reward.
The key is to minimize your risk as much as possible while maintaining the possibility to reap high rewards. This is why I’ve highlighted the five worst mistakes an investor can make.
1. Not cutting loses at a set percentage decline price
It is important to have discipline when investing. If you don’t consistently cut losses on stocks that decrease in value, sooner or later you will suffer some big losses. Cutting loses at a set percent, on every stock you own, will not only prevent big money loses, but allow you to invest in stocks that are working instead.
2. Purchasing low price, low quality stocks
Many investors make the mistake of banking on the fact that buying low price stocks will lead them to bigger percentage gains. This may be mathematically correct, but low price stocks are low price for a reason. The cliche, “you get what you pay for” could not be more correct when it comes to the market. Rule of thumb: low price low quality.
3. Fighting the trend of the general market
Research is the key to being a winning investor. A low price stock could make you a million dollars if you pick it right. To be successful in the stock market, you must be abreast of general market trends. How do you do this? Observe, Research, React!
4. Not having a buy and sell strategy
Buying a stock on a whim, (i.e. a stock tip from a non-expert) will lead to low returns. Formulate a strategy that sets a standard for stocks you will buy, and a percent decline you will sell them at.
5. Spreading your money over to many stocks
If you spread your money out too much, when you buy a winning stock you will not make as much money. Concentrate your money on a few top quality stocks, know them well, and watch them carefully.