Playing the markets is one of the most popular methods for realizing passive income. To succeed, however, one must have a wealth of financial knowledge and comprehension of the industries in question. In 2019, unfortunately, easy availability has given rise to an increasing number of inexperienced traders entering the market without properly preparing. As a consequence, they frequently lose money on unprofitable investments. So, what are some of the most common reasons why beginner traders do not realize a gain when they first buy their assets?
Relying on Popularity, Not Data
According to Doron Rosianu, the Pitbull Trader, buying the wrong kind of asset at the wrong time is the leading cause of large losses. In other words, investors who purchase certain commodities, futures, or even stocks for the wrong reasons are less likely to succeed. Well, one of the most common examples of this mistake revolves around transactions that are based on popularity.
So, for example, a person who is interested in owning shares of Amazon simply due to their vague familiarity with this brand is setting themselves up for failure. Why? Because there are many more factors that need to be addressed. Some of the more important factors to consider would be the financial statements of the company, the company’s short and long-term goals, outstanding litigation, and similar.
Not Knowing How to Interpret the Numbers
Being able to retrieve a public company’s financial information is not very impressive when someone has no idea how to interpret it. Hence why reading the income statement or the balance sheet and being able to find things like liquidity and account turnover ratios is extremely important.
Additionally, financial data can be used to forecast future operations that are directly related to the success of the company, and by proxy any investments made in the said company. After all, the more money the business makes, the higher the chances of its shares increase in value. Not to mention the potential dividends that might come into play.
Failing to Diversify
The Pitbull Trader further reminds that diversification is a crucial concept in investing. For those unfamiliar, this means “not putting all of your eggs in one basket.” So, when a buyer has $10,000 to spend, per se, they should not use all of it to acquire a single type of stock or even a single class of asset. Doron himself prefers commodities and futures and has seen a good deal of success. There are also various types of bonds, ETFs, options, and numerous other asset types that can be used to provide versatility.
That way, if one specific industry or resource is in a downward spiral, they can still retain the assets from other markets. For example, if the technology sector is failing and all tech-based companies are losing money, investors who own pieces of such organizations will also suffer. If, however, they also own pieces of industries like healthcare or industrials, or commodities like oil and copper, they will experience a contained loss.
Not Playing the Long-Term Game
It is also extremely common to see beginner traders get scared when the market temporarily declines. History has taught us that every drop in the value of the market will be accompanied by a stage of growth. This is why most companies are now trading at prices that are considerably higher than they were a decade ago. Thus, even though there was a major financial crisis, a lot of ventures survived and came back much stronger.
In cases of inexperienced traders, however, sudden drops look like nothing more than aggressive losses that will never be recovered. Thus, they often decide to get rid of their holdings at the first sign of weakness. This means that they never give their asset enough time to recoup.
Consider the example of Brent Crude, for instance. In October, their oil prices were clocked as high as $85.00 per barrel, while by January prices had fallen all the way to $50.77. Inexperienced investors would see this sharp drop as a sign of things to come. However, prices have already rebounded back to $66.00 per barrel in only 2 months. This type of rebound is typical, and prices are expected to continue their upward trajectory into the future.
Overlooking the Opportunities in Day Trading
Ultimately, there are those who make the opposite mistake and completely ignore the short-term opportunities. Instead of failing to hold on to their securities for long enough, this group of traders is unwilling to sell. For them, keeping their asset is the key to success, and the perfect conditions for sale will probably never arise. This means that they are overlooking one very important way to make a passive income – day trading.
Doron Rosianu explains day trading as the strategy where each asset – be it a commodity, future, or stock – is purchased and sold within one trading window. Thus, someone purchases a stock when the markets open, and they sell it before the day is over. Obviously, this is commonly used for those who have a high tolerance for risk. However, this strategy capitalizes on volatility within the market, potentially buying and selling a single stock several times throughout the day to realize the same gains multiple times over.