Warnings of Stock Trading

Warnings of Stock Trading

Do not let your emotions or bias cloud your judgement when you are buying stock. Just because you love a particular brand of doughnuts does not mean that you should be buying stock in that company. Even the best products can be produced by companies with poor management who will eventually run them into the ground.

Do not use market orders for thinly traded stocks; use limit orders only. Thinly traded stocks are typically issued by small, not-well-known companies and don’t attract much interest from stock traders. They tend to have much wider spreads, which means a market order can be filled at a much higher ask price than the last traded price of the stock. These stocks can be difficult to find,however, so it might take you a while to find a low-valued stock.

Avoid common mistakes that plague newcomers in the stock market, chief among which is the temptation to speculate (take a chance on a risky stock). Other mistakes include:

  • Buying and selling frequently in an effort to make a fast profit
  • Chasing the hottest stocks (with the biggest recent gains), also known as momentum investing
  • “Feeding the dogs” (indiscriminately buying stocks with the biggest recent losses or trading at low valuations)
  • Buying penny stocks (stocks of small companies trading near or even below a dollar)
  • Buying stocks on margin
  • Short selling
  • Buying options or futures

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