3 Reasons Why You Should Never Trade Stocks
There is a clear difference between speculating and investing. Speculation is short-term trading with the aim of predicting the movement of a stock or any other security and profiting from volatility if the prediction turns out to be correct. Investing, on the other hand, is something profoundly different.
When you invest, you must first do a serious job of researching and evaluating companies. It also requires you to read the company’s financial reports to gain a solid understanding of the business model as well as the company’s financial history.
Investing also forces investors to think long-term, which can make all the difference in the stock market.
But trading, in the pure sense of the word, seems to govern overall activity in the capital markets. Professionals, for example, use complex trading algorithms, rely on computers and engage in high-frequency trading in order to be a fraction of a second faster when it comes to executing trades. orders.
Despite the allure of the stock trader, speculating rather than investing in companies can be a dangerous business and novice investors in particular tend to make three crucial mistakes when embarking on their first stock market adventures.
1. Transaction costs
Ask any investor or trader and they will tell you how quickly your returns can be shattered by constant trading activity. Buying and selling stocks or other securities is not free: every time you make a trade, your broker smiles and collects a retainer, whether your trade is profitable or not.
Transaction costs add up incredibly quickly and put downward pressure on your performance. Trading and exiting stocks is a surefire way to lose a lot of money.
Understand that virtually everyone in the market is under pressure to be active and feels compelled to trade – and that’s not good for thoughtful decision making.
2. Don’t chase the market
It’s pretty much “Behavioral Finance 101”. If you hunt the market, you’ll quickly find yourself willing to pay almost any price just to be able to jump on the bandwagon.
Fear of missing out is an emotional trap that can cost you dearly and often leads to stock market bubbles where investors don’t care what price they are paying.
Chasing the market, or safe for that matter, is a great way to lose your shirt. Also: Don’t believe the “hot stock tips” that are floating around. In the stock market, nothing is certain. Never.
3. Losing sight of the big picture
Probably the biggest problem with short-term trading is that many traders lose sight of the big picture.
If you focus only on, say, a quarterly earnings release to form an opinion about a company, you may miss more fundamental intangible developments, such as a solid turnaround in a company’s operations or a reorganization. promising.
These developments need time to materialize and traders could leave significant returns on the table by focusing on short-term financial performance or intraday stock price swings.
The insane result
Thinking long term and doing real valuation work has many advantages over constant trading where you pretend the grass is always greener on the other side.
Trading can be extremely expensive and requires you to be an excellent market timer who knows exactly when stocks are going to go up or down.
Instead of trading, consider the opposite: invest for the long term based on solid fundamentals, such as steadily increasing revenue and profits. Warren Buffett, arguably the most successful investor of modern times, certainly prefers this approach to making money and maybe you should too.