Traders have been warned not to ‘jump on the bandwagon’ when making investing decisions. That’s the view shared by a CEO of a leading Forex Broker, who also suggests investors should take ‘expert’ opinions on social media with a pinch of salt.
So what other tips should traders – particularly beginner investors – follow in order to avoid costly mistakes? Let’s take a look.
How can beginner investors avoid costly mistakes?
According to David Shayer, UK Vantage CEO, traders can avoid making costly mistakes by choosing news sources carefully, being cautious of tips on social media and avoiding the need to jump on any investing bandwagons.
Let’s take a look at each of these tips in more detail.
1. Choose news sources carefully
Many traders today rely on news sources in order to select stocks. The theory is that by reading the news, understanding company reports and reading up on any potential policy changes, investors can pick up on any trends that may impact the share prices of specific companies.
However, in the age of the internet, there are almost limitless news sources to choose from. With this in mind, it goes without saying that some publications are more trustworthy than others.
Shayner says investors should pay close attention to the news sources they rely on and be wary of social media. He explains: “No trader should rely on traditional publications exclusively. The world has moved on. However, nor should they depend exclusively on social media and make trades based on a single Tweet.
He further clarifies by saying, “Traders must gather information from a range of sources and work out which ones are best for what.”
2. Be cautious of social media investing tips
Social media has undoubtedly changed the way we learn about breaking news, with Twitter often the first port of call if we’re particularly keen for the latest insights on a developing story.
While social media has its supporters, many of the most popular platforms attract a fair amount of fake news. With no borders to contend with, fake news on social media can sweep across the globe and easily deceive large numbers of people.
Shayner points at a recent fake press release from Walmart shown on social media. The release incorrectly suggested the retailer would soon accept a new cryptocurrency as a form of payment. When the release went viral, the price of the mentioned cryptocurrency skyrocketed, until falling sharply after it was discovered the news was fake.
Shayner also comments on the ease with which inaccurate news can develop, especially within the investing sphere. He explains: “Anyone can start up a channel and post trading advice, for which there’s plenty of demand. The pandemic has seen a sudden rise in the popularity of financial influencers who post tips on the likes of TikTok.
“However, the ungoverned nature of social media means there’s no shortage of unscrupulous people out there providing false information and selling get rich quick schemes.”
3. Don’t jump on investing bandwagons
A final tip for beginner investors is to avoid stocks that have been ‘pumped’ because of online hype. That’s because traders jumping on investing bandwagons can turbocharge the share price of a particular stock. This can make a particular stock surge above its true value – if only temporarily.
Shayner explains this concept in more detail. He explains: “Investors flock to so-called meme stocks – whereby social media hype inflates the price of an asset for the wrong reasons. While some of these are coordinated attacks against hedge funds, it shows how social media contributes to inflating the price of popular stocks and ETFs.”
A good example of this happening is when retail investors piled in to purchase Gamestop shares last year in retaliation for the behaviour of a particular hedge fund that hoped to profit from the retailer’s future collapse. While Gamestop’s share price skyrocketed, it was soon followed by a sharp fall.
Shayner highlights how retail investors can lose out when such events happen, and he warns against joining the party. He explains: “Hype makes it easy for retail traders to get sucked into a bad trade. But if you’re hearing about an ETF that has performed very well, you might have already missed the boat. Best to err on the side of caution”.
What else should beginner investors know?
As well as the above investing tips, if you’re new to investing, it’s worth familiarising yourself with the investing basics to give yourself the lowdown on the stock market. As with any investing, always remember that your portfolio can fall in value as well as rise.
Are you planning to invest? If so, take a look at The Motley Fool’s top-rated share dealing accounts.
The post Beginner investor? 3 tips to avoid costly trading mistakes appeared first on The Motley Fool UK.
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