When it comes to investing in stocks, mistakes are part of the learning, right? Well, experts say that it’s OK to make them, as long as you learn from what you’ve done. But before you do that, why not learn from the errors that other investors have already made?
Let’s take a look at three common mistakes made by stock traders working with at-home level investment accounts. (And using fictitious companies as examples.)
Mistake 1: Trading During Extended Hours: Unless you’re moving lots of money around on the market, leave after-hours trading to the big guns (who are typically operating from a more buffered financial position). Watching a stock price after the general bustle of the floor has ended means you’ll see that stock’s price react in a greatly exaggerated way to most purchases and sales. The reason is that the volume of trading is so low, relative to the traditional 9:30 a.m. to 4 p.m. period, that what is otherwise an unremarkable purchase or sale can look like a run or a dump. For the suddenly excited (or anxious) trader, what seemed like a diamond investment — or a wise get-rid-of-it moment — suddenly looks different in the sober light of morning. The point is: when the usual day session forces are at work, prices change within a more disciplined environment. You want to make your buy and sell decisions in that environment well, not during some super-sensitive after-hours session.
Mistake 2: Trading on Stocks with Low Volume: Here’s an important principle when it comes to making money on trades: volume affects spread. The spread is the difference between the asking price for a stock and what bidders are offering for it. Conventional wisdom says that unless you’re investing with a very large amount of money — well above what might be a $5,000–$20,000 home-trading scenario — you don’t want to flirt with a spread much greater than 1 cent. There are other ways to think about it, but for now, consider a penny as a reliably safe spread. Now, let’s say you’re looking at stock in your friend’s East Coast produce delivery company. She says that this week is a great time to buy in. Before you do that, however, think about how volume affects spread.
- Low Volume Means a ‘Vulnerable’ Spread: The spread on Friend’s Delivery is a penny, but last week your friend said she saw it bump up to 4 cents. It’s dipped back down, so maybe getting in now means you can clean up later? But when you look, you see that Friend’s Delivery came in at a one-day volume of just 28,000 shares bought and sold. That’s not a heck of a lot, compared to a lot of other stocks. In fact, it would only take a few thousand shares, bought or sold, to massively change the spread on this company’s stocks. Volume can be manipulated by someone with just a couple grand at his disposal. This is probably not the kind of stock with which you want to be involved.
- High Volume Means a ‘Resilient’ Spread: By comparison, Helios Search Engine is posting 30 million shares traded. Now, it’s going to take some kind of serious player to alter the spread much more than a tick or two. You can get in or get out of this stock with some basic assurances that a 2-cent spread is not about plummet to $0.75 cents the first time somebody drops 10,000 shares.
Mistake 3: Order Fill Assumptions: So you’ve just clicked the mouse and bought a stock. Don’t for a minute think that the transaction is instantaneous. There’s still a broker out there who has to fill that order. Now, there are so many ways to fill orders, and so many kinds of orders that you can make, that there’s no one example to serve all of them, but you can start out by thinking about the process this way:
- Assessing a Price Difference: You can’t assume the price is locked in. For example: If you order 1,000 shares of a $55 stock and you find out that those shares actually cost you $56,500, then your broker bought those shares for $56.50 per, not $55.
- Reacting to Price Differences: You need to know what to do to protect yourself if something you don’t get your price, especially if it happened because your broker dropped the ball on executing your order in the most efficient way. Talk to your broker. Find out the reason.
But if you can’t get a satisfactory answer, or you think there’s a problem with the answer you do receive, then you may have a case for the regulators. If you think you haven’t received the best execution of an order from your broker, the Securities and Exchange Commission can help. Check the rules, here, and follow this link for information on asking questions directly.
And Finally, Do Your Homework
Number one, do your research. Know your target stocks! Think about digging into the concept of researching stocks by industry. You wouldn’t buy a sailboat and take it out on open waters without a serious understanding of the vessel, the skills required to operate it, a weather report, and some charts. Your money, the boat, well … everything is at stake. So, keep the preceding tips in mind and don’t treat the stock market like a rowboat on a pond. Investing is a big step, so spend time learning how to do it the right way. Keep your eye on Wall Street Survivor for more advice on more common mistakes to avoid in the market.