When investing, it is important not to put all your eggs in one basket.  So one of my baskets is the stock market.  It isn’t a particularly large basket since I only started getting into the stock market over the last year or so, but nevertheless it has been an interesting year.

Here are 3 lessons I have learned since engaging in the stock market: 

1. Follow Your Own Instincts and Do Your Own Research

Well, you could be wrong but wouldn’t you rather kick yourself for your own mistake than someone else’s mistake?

Last year, I picked a stock that I knew was going places but I hesitated and decided against buying it because I listened to the advice of my stock broker.  The stock value rose from 1.90 to 4.40 before I finally went against my broker’s advice and bought in.  Now imagine if I had bought the stock when I first thought about buying it?

2. Don’t Get Greedy

I remember reading a book by Robert Kiyosaki once and he said it is important to have an exit strategy.  Of course, he was talking about the bigger picture, but I think it is just as apt for the example I want to share with you.

Back to the stock I mentioned above.  I was a little disappointed I had missed the boat, but was happy to see the stock continue to rise.  I initially decided I would cut the stock at 5.00, but when it reached 5.00, I pushed it to 5.50.  When it hit 5.50, I said, 6.00.  It got to about 5.80 and then it dropped all the way back to 1.90.

Although I had my exit plan, I got greedy and I didn’t stick to it like I should have.  I was trying to win back what I lost when I waited too long before buying the stock in the first place.  Although I wouldn’t have made as much money as I would have had I bought the stock when I originally noticed it, at least I would not have lost so badly if I hadn’t been greedy.

3. Cut Your Losses 

It is important to know when to cut your losses instead of tying up your money in a dead stock that isn’t moving any where but possibly downwards. 

Again, we’re going to look at that stock above for an example.  When the price of the stock started to drop, I held on to it hoping it would go back up.  When it dropped below my purchase price, I was even more desperate for it to go back up so I wouldn’t lose any of my original investment.  Instead it continued to plumet and yet I still held on to it.

In the end, I sold the stock at 1.93.  If I had made the decision to cut my losses earlier, I would not have lost as much and I would have been able to put the money towards another stock that would have done better in that time frame.

These three are very common mistakes that a lot of people make when they start investing in the stock market.  Particularly the third one - there is a tendency to get too sentimental about your stocks.  I know a person who has been holding a particular stock for years because she didn’t want to lose a portion of her original investment.  That is years where her money isn’t doing anything.  She would be better off selling the stock at a loss and putting her money in a fixed deposit.