The stock market is one of the best investment instruments available today. Unfortunately, so many Filipinos could not maximize its potential due to various reasons, like lack of knowledge and capital. But that is only one reason why less than 2% of Filipinos are invested in the stock market.
But not all hope is lost since thousands of new prospective investors enter the market to test the waters of stock trading every year.
However, with much enthusiasm and hope regarding the opportunity to earn an additional income, many newcomers are quickly disillusioned when the market takes their hard-earned money.
So, before venturing into the stock market or any investment instrument, it is crucial to know its risks. Simply said, never invest in something that you don’t understand.
If you want to read the basics of the stock market, you can read it here.
Remember that no one starts as an expert. Everyone will start as a beginner, but anyone can improve through constant learning, practice, and dedication.
Here are ten common investing mistakes that I made and also observed from other stock market beginners.
1. They invest in the stock market without insurance and emergency fund.
The most common mistake of newcomers in the stock market is investing without insurance and emergency fund.
Like what I wrote regarding building a strong financial foundation, insurance and an emergency fund will protect you financially in unexpected circumstances.
Immediately investing without a proper foundation can lead to untimely withdrawal of trading capital if emergencies happen.
2. They listen exclusively to social media analysis and hypes.
Social media, though with pros, are also filled with too much noise. One of the worse types of noise is when people with bad motives use social media such as Facebook, Twitter, YouTube, or Reddit to take advantage of the lack of knowledge of newbies.
That is why who you listen to is very crucial. Never follow people who give blind recommendations and guarantees. It would be best if you will know how to analyze stocks on your own.
One of the best and no-nonsense learning resources for the Philippine Stock Market is offered by Investa. You can access their learning resources here.
Note: I am not affiliated with Investa. I am just an avid fan, supporter, and user of the platform since 2017.
3. Not understanding the risks of the investment.
Every investment has its inherent risk, so when you hear someone offering a “risk-free” investment and will even double your money in just a short time, you have to run as far as possible and as quickly as possible from that person.
Just like the quote, if it is too good to be true, it probably is. Don’t wait until you become one of the scam victims in the Philippines. Control your greed, and you will not be victimized.
Going back to the stock market, it is a high-risk, high-return investment instrument. It means that the stock market price can and will change without notice.
However, the risk can be minimized by setting some rules. For example, if you’re a long-term investor, you only need to continuously and regularly buy quality stocks regardless of its price in hope that in the future, it will appreciate. You’ll need to learn more about fundamental analysis for better stock picking.
For active traders and investors, you need to maximize your gains when you’re right, and limit your losses in the event that you’re wrong.
To do this, you need to set your entry price, target price and cutloss price before buying. You’ll need to learn more about technical analysis if you want to perform better in stock picking.
4. Not understanding opportunity cost.
One common mistake of beginners is they enter the stock market as traders but end up becoming long-term investors because of costly errors.
One mistake is they don’t cut their losses when it is still small, thinking that the stock will eventually rally again. Though it happens sometimes, more people get trapped or “naipit” in a stock that they wrongfully held.
The problem with not cutting their losses early is the opportunity cost they incur. Think of it this way, a 10% loss will require 11% to break even, a 20% loss will require 25% to go breakeven, and a 50% loss will need a 100% gain to break even.
The time and resources that you could’ve used to invest in another stock if you only cut your losses early on will be an opportunity cost. It can also damage your mindset since you had to endure looking at your bloody portfolio.
5. They keep on falling for fear of missing out (FOMO).
In January 2018, the Philippine Stock Exchange rallied to an All-Time High of 9078.37, and almost all media outlets are running success stories as if they will never end.
Facebook, Twitter, and Instagram were filled with people showing off their portfolios’ paper gains. Eventually, more and more people opened their trading accounts, hoping to copy their peers’ “success.”
However, just like many good things in life, it had to end. So when the euphoria peaked and the market started to fall and fall, people started panicking.
The panic resulted in two outcomes: either they held on to their position for a long time or sold every share they bought and never returned to the stock market again.
This event happens every year. New investors enter the market in January as a new year’s resolution, then blindly follow someone on social media, loses money, and tap out by June.
The main reason is based mainly on their fear of missing out (FOMO). They only look at the probable positive outcome but not at the process.
They often think that since others are earning from the stock market based on their social media feed, they also need to jump on the bandwagon or be left out.
To add, FOMO is very rampant in investing, so I’ll repeat, invest only in something that you understand.
6. They don’t want to learn how to be an independent thinker.
Another mistake of beginners in the stock market is blindly following “investment gurus.”
After reading posts in a Facebook Group or watching a YouTube video, they usually enter the market and then buy based on the guru’s recommendations.
This happens typically during bull markets since almost everyone is earning. Eventually, the market starts to decline, and the happy followers of the stock market “geniuses” start losing their gains and then their capital.
So for beginners, it is essential to know how to make the trades for yourself if you want to avoid this. Learn to be an independent thinker and decide for yourself. That will be the start of performing better.
7. They think that the stock market offers guaranteed returns.
Some investors think that the stock market guarantees a positive return on their investment. However, they are quickly disillusioned then they suffered their first significant loss.
Remember that the stock market is a high-risk, high-return investment. No one can guarantee a positive return. Even Fund managers cannot give guarantees. They can only project the potential return based on the historical performance of the stock market.
8. They look at the money to be made more than the process.
The stock market is one of the best places to learn about yourself. It can teach you about patience, humility, and how to handle losses.
However, many beginners are not interested in undergoing the learning curve required by the market and are immediately enticed by the potential returns.
Like what stock market experts explain, they always reiterate that the process is more important than the profit. The profit is only the byproduct of following the process.
9. They look at the stock market as gambling instead of a business.
Some beginners in the market think that the stock market is just gambling. They want to feel the excitement of the fast movement of the market. They also have the “jackpot mentality.”
However, the stock market needs to be treated like a business if you want to remain for a long time. You need to know the companies you want to invest in and make sure they are fundamentally sound. Avoid investing in penny stocks.
10. Not understanding that the stock market moves in cycles.
The stock market moves in cycles. It will go on a bull market (uptrend), a bear market (downtrend), or even sideways.
Stock prices will move up and down depending on different factors. When the economy is strong, or there is a positive outlook, most stocks will move up. When there is an economic crisis like a pandemic, housing crisis, or political crisis, stocks will go down. Or sometimes, the stocks will only move on sideways for a long time.
The stock market requires life-long learning and dedication. And if done right, it will reward the prepared.
More than the potential profits in the market, the stock market offers a way to know oneself. It can help you develop patience, perseverance, grit, and resilience.
It will teach you to tame your emotions, read about the world, and even find other opportunities.
If you want to get the latest posts from Rat Race Running straight to your inbox, please enter your email address to subscribe! Thank you and have a great day!