So, you have decided that you want to use some of your free cash and start investing in stocks. While stock investment could potentially be a good way of increasing your capital, there are plenty of potential mistakes that can be made. Investing carries risk, however, knowing what the common mistakes are, and how to avoid them, could help you reduce them.
eToro is home to millions of traders and investors from around the world. Those who are consistently successful, often join the Popular Investor program, enabling them to earn a second income on top of their earnings from successful investments. As smart, calculated investors, they offer excellent advice to those who want to invest in stocks. Below you will find some common mistakes both beginner and experienced investors make — and how to avoid them.
1 — Starting too Big
One of the most important attributes of successful investment is patience. The lack of patience is common to almost all of the mistakes that will be listed here. The first common mistake is investing too much capital in your first investments. Lena Birse (@Onegirl) is a wonderful example of an eToro investor who took her time and started small.
Recently, Birse told Bloomberg the story of how she and her husband sold their heating business in Bristol and decided to invest it. Birse did not want to pay hefty management fees to a broker or money manager, and decided to do it herself on eToro. Initially, she made small investments in companies she knew, such as popular UK retailer Tesco. However, as the years went by, she started eyeing international tech companies, and today, they make up the bulk of her portfolio. And it paid off: her portfolio is up more than 70% this year.
2 — Not Experimenting
Wouldn’t it be wonderful if you could invest in your favourite stocks, study their patterns and learn how to utilise various strategies without any risk? Well, turns out you can. eToro Popular Investor Heloise Greeff (@rubymza), a Research Fellow in Machine Learning at Oxford University, took advantage of the eToro Demo Account to figure out her trading style before risking her own money.
Greeff quickly figured out that short-term trading was not for her. “I learned some hard lessons before I put real skin in the game,” she told Bloomberg. When she finally decided to invest with real money, she focused more on stocks, which now comprise almost her entire portfolio. Her patience and experimentation paid off: she hasn’t had a losing year since 2017 and is in profit of more than 20% so far this year.
3 — Going on hype, Instead of Research
Some of us have friends like this: “Did you hear? Tesla is about to unveil a new truck and its stock is going to pop 30%!” Beware these sorts of rumours and “advice.” Trading and investing involve research and a deep understanding of the assets in which you invest. Just ask Popular Investor Jay Smith (@jaynemesis), one of eToro’s most successful and followed investors.
While initially reaching incredible heights in 2017-18, his portfolio later shrank by nearly 54%. Smith then decided to change strategy, leaning less on hype and more on research. He is still an active member of the eToro community, but now spends more of his free time doing research and investing in stocks. And it pays off: his portfolio is up more than 60% this year.
4 — Using Techniques you don’t Fully Understand
It is easy to be tempted by methods such as leveraged trading, which could multiply your trade size by a factor of up to 400(!). However, there is a reason retail investors often lose with leverage: losses are also multiplied and trades could quickly plummet to zero. Seasoned short-term traders may be able to make use of such techniques, but they are also fully aware of the high risks they entail.
Responsible stock investment, especially for beginners, is a long-term process, and practices such as leverage and short-term “swing” trading should stay in the realm of experienced day traders.
5 — Looking at your Portfolio too Often
Relax. Investment is not a “fire and forget” practice, but going to the other extreme of checking your portfolio’s performance every few hours is not recommended either. As mentioned before, stock investment is a long-term practice, and, therefore, you should not look at the bottom line too often. If your strategy is planned over six months, for example, then check your portfolio once a week, just to see that you are on track.
Most importantly, don’t panic if you see red. If your investment is backed by solid research and a well-rounded strategy, short-term losses should be part of your plan. Remember: it is safer to stick with your preplanned strategy than to go with your gut feeling.
6 — Using Money you will need in the Future
Don’t spend the money that you are saving up for a house or for your kid’s university fund — on stock investment. The age-old warning of “only invest capital you’re prepared to lose” is always true. Yes, investing can potentially be profitable and, when done properly, patiently and moderately, is one of the most recommended methods of growing your capital. However, there could always be sudden market crashes or other unforeseen events — so don’t use the money you are planning on in the future, only the money you can afford to lose.
“Human nature being what it is, sometimes you don’t stick to your plan, and so far it’s been a wrong move,” eToro Popular Investor Michael Mullins (@lojikfool) told Bloomberg. After more than 20 years of stock investment, Mullins has learned that “boring is better” and that you should always stick to your initial strategy. This mindset has paid off for him, as he is up more than 30% this year.
Or… You Could just copy an eToro Investor
Another way to avoid rookie mistakes is by letting more experienced traders and investors do your investments for you. On eToro, you can do so quite simply by using CopyTrader™, a method with which you can allocate some of your funds to replicate the actions of a Popular Investor. The risks are still there, but with as little as $200, you can start copying another trader, who has much more experience with risk mitigation. Moreover, on eToro, all of the investors who can be copied have their stats transparently displayed on the platform, including a unique Risk Score which could help you make better decisions. As mentioned above, you can experiment with copy trading and investment without risking your money by using eToro’s free demo account. Whatever strategy you choose, make sure to take the above tips into consideration and your financial journey will have the potential of being more successful.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
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Data above is accurate as of October 2nd, 2020.