How to Avoid 6 Common Mistakes When Investing in the Stock Exchange

With the pandemic and the confinements, a boom of young investors decided to start trading on the stock exchange.

Many young people, especially in developed countries, dared to invest their savings in the stock market.

One of the drivers of this craze was the rapid expansion of online stockbrokers (or “brokers”). With mobile phone apps, they have opened the door to inexperienced adventurers by charging very low (or none) commissions for the service.

But, as well as online intermediaries, so have the failures of inexperienced investors who believe that, after reading a little, they can dive into this market following the advice of friends or influencers on social media.

In addition to online traders, there are traditional investment banks or stockbrokers on the market that offer analysis and recommendations in exchange for payment for their services — which, in some cases, can be quite high.

Whichever path you choose, investing in the stock market requires an intermediary who connects the funds to the stock market — that is, who executes buy and sell orders.

And this intermediary must be registered with the regulatory authority of each country in order to carry out the transactions.

After defining this step, it is necessary to analyze whether it is desirable to invest in variable income (such as stocks or funds) or in fixed income (such as bonds).

It all depends on how much you are willing to risk. The greater the risk, the greater the possibility of earning more. And, with less risk, the return that can be obtained on the investment will be reduced.

“It’s essential to know your risk profile,” Hugo Osorio, deputy manager of Investment Strategies at Chilean financial services firm Falcom Asset Manager, told BBC News Mundo (the BBC’s Spanish service).

Some of the main mistakes made by novice investors when deciding to put their money on the stock exchange are these:

Mistake 1: Analyze short term

One of the most common mistakes among people starting to invest is to seek short-term profits. “The minimum horizon that must be considered is three years”, explains Osorio.

Professional investors generally think about making long-term profits, precisely to avoid stock market volatility.

Therefore, the greater the amount invested, the greater the returns over time. As interest is added to the initial capital, the amount reinvested also increases. That’s compound interest, meaning earning more money with your own money.

Mistake 2: Not diversifying

Diversification is a basic rule of thumb for any investor, regardless of the amount of money involved.

You shouldn’t put all your money in one place. Therefore, specialists talk about having a diversified portfolio, with part of its resources invested in variable income and another part in fixed income.

In countries like the United States, the idea of ​​investing 60% of funds in variable income and 40% in fixed income is common, but this formula is usually not recommended for new investors in the stock exchange, according to Osorio.

The best thing is to start investing cautiously, building a portfolio (the investment portfolio) with different types of financial assets and different levels of risk exposure. It’s like going to the supermarket and putting different products in the cart.

You can combine, for example, stocks, funds and bonds. And if you have more resources, you can add coins, raw materials and other more specialized products to your shopping cart.

Recently, Exchange Trade Funds (ETF) have been gaining ground as investment instruments, bringing together the world of investment funds with shares.

Whichever way you decide to invest, make sure your mix is ​​diversified according to your risk tolerance and investment objectives.

Mistake 3: Scaring and Selling

On the stock market, not all decisions are taken with a cool head. Although expectations are based on technical analysis, there are always unconscious or irrational elements at play.

If you can withstand a sharp stock market crash without selling your stock, you can make a lot of money on the next rally. The problem occurs when panic arises. The domino effect can impair judgment and lead people to make rash decisions.

A recent example occurred last year with the Covid-19 pandemic. If you look at the long term, a sharp decline theoretically shouldn’t cause you to sell your stock in the middle of the storm.

Mistake 4: Investing without considering your risk profile (or without having an investment plan)

Each of us has a different risk profile. A good analysis of the limits of your financial conditions and the goals being pursued is essential to know what is most convenient for you.

Some of the fundamental questions are: how much money can you invest, how much are you willing to lose, in what time frame do you expect to achieve profitability, and what is the purpose of your investment. Do you want to earn quick money in less than a year to finance your studies or do you want to invest to get a good retirement?

For those just starting this process, the experts’ recommendation is to seek advice. And as you study and learn how markets work, you will have more tools to risk going it alone.

Mistake 5: Not paying attention to commissions and other associated costs

For those who prefer to invest following the recommendations of an expert advisor, it is necessary to compare the commissions charged by these experts for their services.

But not only that. It is also necessary to consider that there are other costs associated with transactions on the stock exchange that can affect the expected return. If the amount to be invested is too low and the final transaction cost too high, it may not be worth entering the stock market.

If you decide to enter the market using an online platform that charges minimal (or no) commission, there are still a number of costs involved in every investment.

There are, for example, charges for the purchase and sale of assets (purchase and sale commission), stock custody, account maintenance and inactivity fees, payments at the time of withdrawing dividends and the costs of transferring products from a broker to another.

And, if you work with an intermediary based in another country, you will need to verify that this broker is authorized to carry out transactions.

Mistake 6: Getting into debt to invest

This error can be very serious. If you are starting to invest, it is not recommended to take on debt to make transactions.

There are financial advisors who can pressure you to take out loans to invest larger amounts. Online brokers themselves can harass you with cell phone messages so you don’t miss out on “great opportunities”.

No wonder that there is in English the expression “fear of missing out” (“fear of missing an opportunity”, or FOMO, for its acronym in English), which can lead you to invest without having money, simply for fear of losing the opportunity .

These situations sometimes occur, for example, when someone has a streak of luck and is tempted to go into debt to earn more—as when gamblers go to the casino or horse races to bet money and are caught up in the obsession.

Investing can also become an addiction. That’s because, when it comes to the stock exchange, we usually see only one side of the coin: the winners. It is common to see the press publish many stories of billionaires from humble origins who invested and succeeded.

But studies show that, in practice, there are more individual investors who lose money on the stock market than they gain.