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This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Most people who invest in shares do so in solitude, believing themselves immune to the typical mistakes repeatedly made by the vast majority. To help you avoid these pitfalls we look at some of the most common and costly mistakes to avoid to help you extend your investing lifetime for as much profit and duration as possible.
Many people think calling the direction of a share price is easy and so just jump in. No research, no plan, no objectives. This can be a risky way to start investing. While you may bank some quick profits, what happens if you are hit by a succession of losses? After all, you are risking your money. While you might be prepared to risk that cash, you don’t really want to lose it, do you?
Consider asking yourself the following questions:
Why am I investing?
What returns am I looking to generate?
What kind of losses can I stomach?
How frequently do I think I'll invest?
Over what time-frame?
Which product should I use?
These questions can all help you decide how you should invest, defining how much exposure to take on any one position at any one time in order for you to achieve your goals all the while respecting your investment parameters. Increased risk can deliver increased profits, but with it comes risk of increased losses. After all, you only get one chance to lose all your money. Lastly, if you have a plan, stick to it.
Essential to your investment success is having three key elements in place; the right strategy, the right information and research and most importantly the right product.
While most people understand traditional shares, this doesn’t mean they are the only way to speculate on a company’s share price moves. You may be pleasantly surprised that a host of alternatives could well be more appropriate for you depending on your chosen style of investing.
Look at the below profiles and see which fits your current approach and which might better fit your style and requirement.
SpreadBetting (SB) – Small deal sizes; less capital intensive; high frequency; low costs; stamp duty exempt; tax benefits; online platform
Buying physical shares obliges you to shell out the full value of the position upfront, even if you consider it unlikely the shares will ever fall to zero. Maybe you don’t even think they will fall by 25%. So why tie up 100% of your cash unnecessarily? Other products allow you to take the same level of exposure to your favourite shares while requiring significantly less to be paid up-front, potentially even saving you money along the way via lower transaction costs (i.e. no stamp duty).
Most people aim to profit from rising prices. It’s a natural thing and fine so long as prices only rise. But we all know that they both rise and fall - to differing extents within differing trends over differing time horizons. This is what makes the markets interesting and presents us with investment opportunities.
With a traditional shares account limiting you to Buying and thus having only Long positions in your portfolio this means you are hostage to any price declines which could be a risky strategy if markets take a turn for the worst. While having share positions in 10 different companies can be considered diversification, expecting all 10 to rise is also probably a little optimistic. The same applies to putting all your eggs in one basket and all your money in one stock. Egos need to be put in a box.
Other products are available to allow you profit from both rises AND falls in share prices. Identifying and being able to speculate on share prices which may be set to fall could help you hedge/balance your existing portfolio, making it less prone to suffering big losses when the markets turn down.
For example, had you bought BP shares in March 2009 (see chart below) and held them for 6 years, all the way through the tough Gulf of Mexico disaster period (May 2010; shares -54%), they might have delivered zero capital returns, your only profit coming from dividends (suspended for most of 2010) and having had to put up with a roller coaster of a ride. Note, however, the 365p and 500p levels which offered several buying and selling opportunities and potential returns of 30% each time for those prepared to trade the inevitable ups and downs that the shares have offered over the years.
Source: IT Finance
It’s natural to focus on what profits can be made. It’s optimism. It’s human nature. But it’s also important to consider what you could lose on that position before deciding whether it is worthwhile or not.
The best investors/traders always consider the worst-case scenario for each transaction too, i.e. - how far the price could move against them. While we tend to be quick to set exit levels for profits, it’s equally important to do the same at the other end to limit the possible damage from a bad trade.
“Only risk money you can afford to lose. You’ll be less emotional and more rational”
The experienced weigh up the potential risk AND reward involved in every trade before deciding whether to proceed. While there is nothing wrong with placing lots of trades with the aim of banking lots of small profits (it is a perfectly valid strategy) risking too much and taking too many costly losses along the way is best avoided. See our educational piece on Risk vs Reward for more details.
“Investing is as much about capital preservation as it is about capital accumulation”
What’s more, if a profitable position wants to become more profitable, why not let it? Trailing stop losses, allowing you to lock in rising profits, are one of several tools rarely available to traditional share investors who are lucky if they have access to even simple stop losses usually having to open/close all positions manually.
Click the image to enlarge
when prices drop sharply people often get Interested in recovery potential and hopes of a rebound. ‘Doubling down’ or ‘averaging in’ is a valid strategy, widely used and in many cases highly profitable, however, don’t forget that a 10/20/30% fall in share price requires a bigger percentage recovery to achieve breakeven. While the absolute change in price will be the same, the lower starting point means that the percentage recovery required is always greater.
Don’t let pride and ego get in the way of your investment goals. If you’re wrong you’re wrong. Closing a bad position may deliver an acute sting but staying in one can result in chronic pain. A trade may be right today but easily wrong tomorrow. Be honest and move on. As in life, learn from the experience. If big news changes your view on an investment, it may be time to re-evaluate the position.
“Trade what you see, not what you want to see”
Because shares are paid for in full, with no further demands of the investor even if they fell to be almost worthless, many are guilty of ignoring losing positions, hoping they will come back. While ignorance may be bliss, forgetting about them will never erase the loss. There is a lot of truth in the old adage that “a long term position is often simply a short term trade gone wrong”.
“Move on from your losing positions. Don’t forget them, just forget how you felt”
While keeping records of past investments is a helpful exercise allowing appraisal of what went both right and wrong, so too is reviewing your portfolio of open positions regularly. Some even say that if you can’t see a valid reason today for replicating an existing investment then why keep it open? While reviewing your positions is key, so too is knowing you are using the right product for your strategy.
Don’t get sucked in by get-rich-quick schemes promising strategies that will double your money in a short time period. While theoretically possible, the majority unfortunately tend to involve seminar (for a fee) designed to sell you a book (for a fee) which will focus on you trading big and often (with a preferred provider). This is fine so long as you appreciate the risk involved.
Furthermore, if these strategies were so good/successful, why is someone needing to supplement their income by offering fee-paying seminars? Why aren’t they trading from a deckchair on some island paradise? Be realistic. There’s no such thing as a free lunch. There is no magic formula. What there is though, is a world of investment opportunities. Furthermore, starting off with £10,000 and expecting to generate a secondary income of £100,000 per annum is unlikely to happen. While objectives and goals are important, they also need to be realistic.
Technological advances have in many cases put retail investors on an even keel with the professionals in the Square Mile. However, not all share investors are aware of the helpful tools at their disposal, still relying on telephone dealing, delayed pricing and aggregate orders rather than benefiting from modern platforms which offer DMA (direct market access, live prices), better pricing and in many cases lower dealing costs as well as the option to place future time and price dependent orders.
Furthermore, news feeds and charting packages have come a long in terms of their flexibility, information quality and technical indicators now allowing you to stay right up to date with the financial markets, abreast of what news is moving which shares, why and by how much.
As an investor you should expect a lot from your account provider. However, in many cases you get far from what you deserve. Most brokers rely on leaving huge numbers of customers to invest/trade off their own back, offering little or no support. If they do offer advice, it is often poor quality and bad timing. At Accendo we don’t tell you what to do, as everyone has different investment/trading requirements. However, we are always here to help in terms of education, information and assistance.
Our unique and award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital.
Before taking a position in the markets, be sure to contact Accendo for…Updates - How do things look in terms of investor sentiment? What’s going on in the markets and round the world? What are the brokers saying about your favourite stocks?How to use CFDs and Spread Bets to maximise your profit potential.
How to use the tools available to minimise the risk involved.
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research