Equity Trader, are you Guilty?

While trading mistakes and losses are inevitable (and typically go hand-in-hand) in investing, understanding the human psyche and that the mistakes can be avoided with some forethought can help preserve your bottom line.

Falling in love with a stock. Remember Facebook (how could you not)? Everyone loved it and the hype over Facebook’s IPO was monumental. Everyone expected that it would not only meet but exceed its IPO price and it didn’t. Who’d have thought that the world’s foremost social media company couldn’t live up to expectations. Facebook has closed down on 46 of its 80 trading days and even now it is trading below $20 a share. You can love a stock all you want, but unless you are holding the stock for sentimental reasons (and not to make money) you should know when to its time to end the relationship.

Trying to get even. This mistake is the follow-up to #1 for those investors who insist on holding an underperforming stock. The problem here is two-fold, you have the potential to lose still more money and you have lost the opportunity to take the proceeds of the sale and invest it elsewhere.

Failure to thoroughly understand your investment choice. This trading mistake often follows the first; you fall in love with a stock even though you know nothing about it. Warren Buffett, who knows a thing or two about investing, will be the first to tell you don’t invest in a business or company that you don’t understand. A better option would be to invest in mutual funds or ETFs, so that your portfolio is more diversified.

Impatience. While every equity investor would love to make a killing in the stock market, and many of them do, very few of them make it overnight. It takes time, and that means patience and discipline on the investor’s part. First you need to have realistic expectations and understand that it is the slow and steady pace that prevails. Too many newbie investors give it “a couple of days to see what happens,” and expect at the end of it some monumental event to skyrocket their stock price. When that event fails to materialize they cash out and try their luck with another stock instead.

Of course there are plenty more “mistakes” that new equity traders are guilty of, and you may have fallen for a pitfall or two in your time, perhaps even as a seasoned investor. What advice would you give to a trader looking for his or her first foray into equity investing?