What are the pitfalls to avoid when investing? I think one of the biggest issue is the excess of information we receive. A large number of information does not facilitate decision-making. In order to avoid the impulsive trades in the stock market, you need to determine why you bought the shares and when are you going to sell them. My friend once said: if I had access to the amount of information that the richest investors have, I would earn a fortune in the stock market. Leaving aside the issue of illegal use of confidential information (insider trading) I can’t agree with this theory. In my opinion an excess of information even makes decision making harder. In the market we have access to the vast number of information published by companies and analyses concerning how they can affect the share prices, experts’ forecasts, or recommendations. Unfortunately, very rarely happens that they are consistent.
What was then we usually do? Basically there are two options. We choose the ones that most want to believe in, because the possible overlap with our own opinions and completely ignore others. The second option is to struggle at the market by buying under the influence of positive informations, and selling under the influence of the negative. None of the situations seems to be beneficial to our investment portfolio. In the first case the investor chooses information selectively for their character, rather than assessing their significance. These are one of the most important pitfalls to avoid when investing.
Even if the company instead of an expected profit generated a loss, and its President mentions the third time within a year about issue of shares, because he can’t get along with the banks, after all, you can find news about the potential acquisition, the forecast of increase in revenue, or about recently signed contract.
The second option, which is to buy when good news appear at the market and selling as soon as we hear something wrong. This, in the best case scenario will lead to a loss more or less equal to the sum of the paid commissions. In addition we don’t draw conclusions, because in the event of the failure all the blame can be put on stocks which prices don’t grow although they should or on expert, who once again was wrong.
Pitfalls to Avoid when Investing
Whether you’re buying shares guided by the technical or fundamental analysis you need to know why you decided on a specific transaction and when the signal to its conclusion is found to be false, so you’d have to withdraw from the market. Otherwise you will not be able to assess its effectiveness and to draw conclusions for the future.
In case of graphs analysis it’s relatively simple. This is a lot more difficult in the case of fundamental analysis, because it’s most convenient to include financial reports here (informations provided on a daily basis by companies are often rudimentary and do not give a complete picture of the market), and sometimes before they will be even published share prices has already heavily fall. For this reason, this method is recommended for those well orientated in companies’ finances, with a good deal of time on the analysis and requiring a longer investment horizon.