The Most Common Trading Errors - And How to Avoid Them

Nowadays, accessing investment is easy. In fact, it’s never been easier. With little more than some capital, a phone, and an internet connection, you’re a few steps away from being able to start trading. However, investing well is a different story. It can be a skill to obtain, one that institutional investors will channel huge amounts of money, brainpower, and computing behind to improve their algorithms for.

However, for retail investors looking to simply make their money work a little harder for them, you don’t need an army of analysts behind you to invest intelligently and with clarity. It’s really a matter of keeping your head, understanding the nature of the investment, and focusing on the long over short-term gain.

The Basics

The range of assets available to you is massive, however, there are several common ones that aren’t overly complicated in how they operate, hence being good places to start for new or intermediate investors. The main three asset classes boil down to futures, options, and CFDs (Contracts for difference).

CFDs futures and options are all derivatives and have pros and cons to how they can each be bought and sold in the market. Futures originate in the commodities market, and simply put, they contain within them a set date to sell the future back to someone.

The speculation on the price increasing or decreasing defines the value the investor might make on the contract. A CFD has neither an expiry date nor a set price and is usually priced in relation to the fixed cost of futures by brokers. Options are almost in between the other two.

There’s an agreed expiry date, however, the investor has the option to either ‘put’ or ‘call’ – either purchase the asset or sell it. That choice is usually defined by whether the price is high or low.

Whichever derivative you choose to work with, understanding the characteristics of the instruments has to be priority number one. Do your homework, as they say.

Chasing the Wrong Thing

A lot of investing discourse is usually about the next ‘big thing.’ There’s nothing wrong with speculating on assets and their potential trajectories. However, the need to research the background of an asset or stock is far better for making decisions on your investments.

Should you choose to invest directly into companies, financial accounts, annual reports, and major news can reveal the fundamental of a stock, and indicate its intrinsic value to a better extent. Finding a way to measure the underlying value of what you want to invest in can be time-consuming and complex, but hugely worthwhile.

Any investor worth their salt will have a plan tied to their portfolio, defining their entry and exit points, and how much risk they want to take on. This can also require a periodical rebalancing of a portfolio to stay true to your investment plan.

A novice wouldn’t dream of selling an asset that’s up and buying an underperforming one – however, the experienced individual knows better. A portfolio that follows market returns only ends up being overweight at market peaks and underweighted at market lows.

As you explore more of the investment world, your confidence working with different assets, and riding the natural ups and downs of the market will become hugely valuable habits. However, the basics of investing won’t change. The foundation of knowledge you begin with will shape how you grow as an investor through your life, and that’s why it’s worth doing right.