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Nobody wants to be labeled an amateur, especially in the world of trading.
Unfortunately, it’s rather common for newbie traders to make a slew of mistakes before they truly find their footing. While there’s nothing wrong with a few slip-ups here and there, by knowing what not to do as a beginner you ultimately set yourself up to save money and make the most of your cash early on.
So, what are the biggest trading and investing snafus that newcomers to the space make and what can you do to avoid them?
Failing To Do Your Homework
Simply put, blindly jumping into the world of trading represents a major mistake if you haven’t thoroughly done your research. Although there’s certainly plenty of noise out there in terms of “who” you should listen to, there’s a lot of education to glean from proven investors. For example, from understanding call option strategies to in-depth market analysis, the web represents a wealth of information for newbies looking to get their start.
Following False Prophets (and Profits)
That being said, be careful who you listen to in terms of trading advice. Sure, you obviously shouldn’t blindly follow the advice of anonymous strangers on the web; however, you should also be wary of “gurus” looking to sell you their “system” versus legitimate advice. If someone’s willing to share their free resources first, chances are they’re worth your time.
Suffering from Analysis Paralysis
In the world of trading, sometimes you just have to get your hands dirty. There’s certainly merit in doing your research and wanting to avoid potential risk, but you can’t truly see returns on your investments if you sit on your hands all day. When in doubt, start working with small amounts of your disposable income to get your feet wet with trading.
Expecting Results Overnight
Success in trading takes time. If you think that you can sink money into day trading in return for overnight results, you’ve got another thing coming. There’s nothing wrong with being enthusiastic, but keeping your trading approach rooted in realistic results is much more proactive than assuming you’re on track to become a millionaire within the net five years.
Thinking That “Cheaper” is “Better”
Just because you’ve found a low-cost option doesn’t mean that you’re guaranteed a positive ROI. While gobbling up cheap investments might seem enticing, you need to make sure that you have some sort of indication that positive returns are there versus assuming they’ll come.
Not Paying Attention to Fees
Remember that fees for trading and brokerage, in addition to hidden investment taxes, can quickly add up if you’re trading at breakneck speed. Assuming that “you’ve got to spend money to make money” can quickly land you in the red if you aren’t careful.
On a similar note, anyone new to the world of investments needs to make sure that they’ve set aside a specific stash of cash for investment or trading purposes. Failing to use your disposable income for such activities is a gamble that’s never worth it.
Some of these tips may seem like no-brainers, but they’re the cause of crash and burn for so many newbies. Knowing what to avoid will ultimately save you money and major headaches on your road to becoming a better trader.
It’s a pretty good list. Though, I would say chasing a high yield is another common mistake most new dividend investors make.
Hi MATM,
That’s true. I have seen it many times with new investors looking to juice their monthly passive income stream with unsustainable high yield stocks. Better go for the lower yielding but growing dividends instead. Thank you for commenting.
I agree, high yield is a huge one for beginners. Not watching out for fees will catch up with you quickly and you won’t even notice it. And choosing the attractive stocks for quick gains never works out. It is the boring ones that will pay you for the long term.
Dividend Daze recently posted…Small Savings, Big Impact
Hi DD,
High yield stocks are those seductive Siren songs of dividend investing. Many new investors fall victim to those unsustainable high yields only to move towards the lower yielding but safer names down the road. Fees are another unnoticed drag on total returns that can really accumulate to a serious amount over decades of investing. As always, I appreciate your comment.
Good checklist for those getting started with stock market and ETF investing. Agree with the comments above about fees – they can really be a hidden factor that eat into your potential returns. Cheaper is better is another good one to keep in mind! Thanks for the best practices.
Jay recently posted…Trend Following Trade Ideas for June 2017 (Part 2)
Hi Jay,
Thanks for sharing those points. I agree that fees are often overlooked by many new investors. Seeing an expense ratio of 1%, for example, might not seem like a lot to a newbie investor but over time it can add up to a lot. Thank you for stopping by and commenting.
Research is were it all started for me, without it I couldn’t even set up a strategy on why and how I wanted to invest.
Then said, we did had a broker that came with high fees. But switched it for a different company that is currently offering one of the lowest fees in our market.
Hi Divnomics,
Thank you for sharing your personal experience when you first started investing. No doubt, education about stocks and how they work as well as how to minimize fees are both great points every new investor should be familiar with. Research and learning will also help a new investor find an investing style that’s best suited for their tastes and risk tolerances. As always, I appreciate your comment.
Hey DivHut,
good points on your list…doesn’t hurt to recall them to the mind from time to time. Even for an experienced investor. Sometimes i tend to overthink an investment, so i know where i have to improve.
And once in a while the temptation for high-yielders knocks on my door too;-)
Keep it up!
Greet’s
DividendSolutions
Hi DS,
I think we are all guilty of some form of analysis paralysis. You know you found the perfect investment yet, for whatever reason, you hesitate to make the buy. As you said, these are all good points to remember even for seasoned investors. Thank you for commenting.