5 Beginner Stock Trading Mistakes That Stop You From Getting Rich

 5 Mistakes in Stock Trading that Can Stop You from Getting Rich

A lot of people have replaced sports betting with investing on the stock markets in the past year.

Online brokers Charles Schwab (TD Ameritrade), Etrade and Robinhood all saw a 170% increase in the number of accounts they opened during the first quarter 2020. This is because eager investors saw the potential after the stock market crash. Each round of stimulus payments has seen investment activity increase.

These amateur traders, particularly the Robinhood crowd, have attracted much attention, especially during January's GameStop Short squeeze.

This is how to make a start as an investor, without going broke.

Trading vs. Investing: It's Possible to Make a Difference

Both investors and traders buy stocks with the intention of making a profit. The terms aren’t interchangeable. Matthew Frankel is a certified financial planner at The Motley Fool's The Ascent. Not understanding the difference puts new investors at high risk.

Frankel stated that "investing" is buying stocks (or assets) with the aim of holding them for the longer term. "Trading is something that many new investors do - they move in and out of stock positions every few weeks -- that's what most new investors do.

Does this mean that you should not trade? But not exactly.

Frankel said that there is nothing wrong with trading, provided that you understand that you are essentially playing gambling and you don't spend any money you can't afford to lose.

Stock trading tips and tricks for beginners

Before you start trading stock, make sure you can afford it. You shouldn't think about stock trading if your retirement account isn't long-term.

A fund for emergency expenses should cover at least three to six months worth of living expenses. You should make sure that this money is not invested in the stock market. If you have cash emergency, don't force your stock to be sold.

These stock trading tips are worth considering if you have the financial means to take on this risk.

One of the biggest mistakes is investing in a company that has just filed for bankruptcy

It may sound like you are getting a huge bargain if you buy stock in a bankrupt business. Hertz shares dropped to 56c after the company filed for Chapter 11 bankruptcy protection May 2020. It looked like a huge bargain so traders raced to grab it. On June 8, the shares were trading at $5.53 each. Then, prices plummeted once more. At the time of writing, March 31, 2021 shares were valued at $1.72

Companies declare bankruptcy when they have too much debt. Creditors and bondholders get paid in full by bankruptcy court before shareholders get even a penny.

Frankel stated, "It may seem like a smart thing to speculate about bankrupt companies trading for pennies on the dollar. But this is a suckers' investment." "Stakeholders will be left with nothing in bankruptcy proceedings, regardless of whether the company continues to exist."

Although many traders may not plan to stay with the stock long term, they are just looking for quick profits. A rally following bankruptcy is often brief-lived, and you never know when it might turn.

Avoid penny stocks. Although they may seem cheap, they are often expensive for a reason.

Stock trading tip - Fractional shares can be a cheaper option than purchasing shares from a bankrupt company, or penny stocks.

Second Mistake: Buying Stocks Everyone Talks About

It's too late to make investment decisions based only on the headlines.

Brandon Renfro is an assistant professor of finance at East Texas Baptist University and a CFP. "One costly mistake is to buy-and sell decisions based upon price movements that have already taken place." Although it is exciting to see a stock go up 10% in a matter of hours, if that is the reason you buy the stock, then you will simply be paying 10% more. You value a stock based on what it will earn in future.

Stock trading tip: Be ready to hold onto the stock for the long term if you are buying the same stock that everyone else is. Stock prices can skyrocket and a dip is often followed by a correction. Only invest if you believe in long-term value.

Third Mistake: Margin Use to Make Bigger Profits

A margin account allows you to borrow upto 50% of a stock’s value. You can only own the 50% that you are able to use as collateral. The rest of the credit is available for you to purchase stocks. The loan is subject to interest.

It sounds great as it allows you to buy more stocks without spending a lot upfront. However, it can lead to greater losses when things go wrong.

Frankel said that margin is a simple way for inexperienced investor to be wiped out. You can think of it as this: If $1,000 is invested in a stock, and it loses half its value, you have $500 to take with you. If you had invested $1,000 of your money and $1,000 in margin you would be left with nothing.

Stock trading tip: Avoid margin if your trading is new.

No #4: Your Portfolio is Diverse Just Because You Have a Lot of Stocks

Most people know it is not wise to invest all of your money in just one stock. Your portfolio might not include stock in as many companies as you think.

Renfro stated, "Beginners often fail properly to diversify as well. Often they misunderstand diversification actually means." Diversification involves more than buying shares in different companies. Diversification involves buying shares in companies that are different to economic fluctuations and pose specific risks.

It may not appear that big-box retailers and coffee chains are related. Both depend on customers having enough cash. They are often found in the same shopping malls, with some large retailers even having coffee shops inside their stores. If one loses customers they will likely lose the other.

You can avoid huge losses by selecting stocks across multiple companies and across many industries.

Stock trading tip - Buying exchange traded funds rather than individual stocks is a better option to diversify your portfolio.

Five-Five: Too often trading

This is probably not something you want to hear if you trade stocks as a hobby. But, it is often a losing investment. It is possible to make emotional decisions based upon what the market does on a given day. You could end up buying high and selling low, which can be detrimental to your investment goals.

Frankel stated, "The best way for stock trading apps to get started is to slowly build a portfolio full of great businesses and then hold on to them as long as they continue to be great businesses." Trades in and out stocks positions are certainly more thrilling. Most people who have achieved significant wealth in stock markets didn't do so by trading short-term. Stocks are best if you invest in buy-and-hold. 6 ways to have fun in stock market using trading or betting