No one is perfect. Whether in our personal life or business, each of us experiences wins and losses. Even making investments is also susceptible to bigger and painful failures, especially when it involves a huge sum of money. When it comes to trading stocks, making mistakes is fairly common. The majority of investors suffer from great losses they never saw coming.
In other countries, some people commit mistakes by assuming that investing in foreign exchange (forex) trading is a form of gambling. In reality, forex trading is a form of financial investment based on market and data analysis. That is why forex brokers offer Islamic accounts for their clients who can’t earn because of their religious beliefs.
In most cases, investors rarely learn from their previous mistakes that they continue to commit the same thing repeatedly. If you think you’re one of them, never think it’s too late. This article will cite some common mistakes involved when investing. Learn from these lessons and learn how to avoid them.
Mistake #1: Buying stocks from a company you don’t understand
Many investors often lean toward fancy-sounding or trending industries. In most cases, they know very little or nothing about the business the company engages with. But it doesn’t keep them from jumping on the bandwagon and blindly investing in what they assume is a profitable company. This leads investors to overlook the risks and benefits of the industry.
Knowing a business or an industry gives you a competitive edge over other investors. One example is when a person who runs a food franchise is more attune with companies operating a restaurant business. This gives you a first-hand experience if there are changes in consumer habits. Before it becomes public knowledge, you will immediately know if the industry is cooling down, going slower, or booming.
Observing the trends in a specific industry you’re engaged in provides opportunities to create good investment decisions. Basically, first-hand knowledge serves as an investment profit that will save you from bigger losses.
Investing in an industry that you don’t understand will give you a hard time knowing the complexity of a specific business. But it doesn’t mean that you should work in a specific industry to invest in it. For example, you don’t have to be a doctor to invest stocks in the healthcare industry. Although there’s no problem with it, having a bit of knowledge can go a long way.
Mistake #2: Making emotional decisions
People treat investing as a combination of art and science. This means making successful investments should be a mixture of the two. Decisions driven by emotion will likely bring disastrous results to your finances. Often, emotional decisions involve biases that are either cognitive or emotional.
Cognitive biases involved established concepts with no certain accuracy. Meanwhile, emotional biases happen when investors base their decision on personal feelings. More often, cognitive biases are easier to overcome than emotional biases.
Emotional decisions happen when an investor purchases an investment and eventually rises, they tend to believe that they already knew that it would happen. Otherwise, if their investment drops, investors convince themselves they already guessed it from the beginning. These inconsistencies in human behavior occur when we rearrange our beliefs to appropriate them in a given situation. Psychologists call this ‘behavioral finance’, where human biases lead to inconsistencies of behavior.
In reality, creating good investment decisions should involve human reasoning and mathematical calculation.
Mistake #3: Lack of patience
Like other aspects of life, investing doesn’t always go as you planned. A steady and slow strategy on portfolio growth will result in bigger returns in the long term. That is why patience is very critical when investing. Making eager and hurried decisions is a great recipe for failures and problems. What makes investors ahead of others is accepting that you can’t make a fortune instantly and expect to get profits overnight.
Before investing, make sure to pack plenty of patience. There will be moments when investing in stocks appears to be dull at first, but giving it more time will lead to valuable results. This often happens when making investments. Don’t feel awful when your investment doesn’t look good from the get-go. Although these cycles will take some time, the results are worth it.
It’s easier to enjoy the stock trading process if you arm yourself with knowledge and knowing how to avoid the most common investment mistakes. Staying away from investment failures can make a huge difference between poverty and wealth. Although direct experience provides plenty of lessons, it is important to take the less risky route by arming yourself with financial education.