Reasons Why You Should Not Be Speculating in the Stock Market
- Author: Mary Singleton
- Posted: 2024-06-21
Spurred by no-cost trading apps such as Robinhood, traders have increased their speculation since the start of COVID-19. Even if they have made money early on, in the long run speculation is a losing strategy. You could end up losing most or all of your investment account. This should not be an investment strategy for you. Here are five reasons why your personal finance strategy should not include speculation.
The Professionals Always Know More
When you are trading at home, you are well behind the institutions and Wall Street investment houses. They know more about the market than you. Professionals have better information than individual investors, including knowledge of what the order flow in the stock is like. In other words, they will always know more than you. Being at an information disadvantage in something as uncertain as speculting in volatile stocks puts in the hole. Since you are always the last person to know of key news when you are sitting at home or trading on your mobile device, you are already starting behind the curve.
The Volatility May Be Too Much to Handle
The average individual investor has trouble handling excrement turns in the marketplace. Uusually, the stocks that are the most popular with investors have the most volatility. You will get too emotional when dealing with the highs and lows. This will cloued your judgement when you need it the most. Speculation is not for every investor, yet everyone thinks they can do it successfully. The truth is that we cannot tell for sure what type of investor is the best speculator. The skillset is just too random to accurately predict who would be good at it. However, the one thing that all good specultors have in common is that they have figurative ice water running through their veins.
Your Losers Will Outweigh Your Winners
When you are speculating in a stock, you usually have a predetermined exit point where you take your profits. This means that you usually do not let your winners ride and will place a limit order to get out of the stock at a profit. However, when you are losing on a trade, you will have difficulty learning when to exit. Therefore, the amount of money that you will lose on a trade will usually outweigh the amount of money that you gain on a winner. Accordingly, with this rule of thumb, you will need to win 60% of the time in order to be successful speculating. That is a difficult ratio for even professional traders to achieve.
Individual Investors Have Trouble Timing
Market timing is something that individual investors cannot do under most circumstances. It is just simply too difficult to do from home unless you have a rigorous and detailed trading system. There is just no way of know what will happen when you see stock trades happening in isolation. Speculation is all about timing. If you end up in a trade late, you can lose much of the profits that you thought you could make. Then you end up holding a stock for longer. In many cases, you end up being the last one in a stock that all of the professionals have dumped, yet you are the last one to know.
It Is Just Plain Gambling
Your activities in the stock market should consist of sensible investing for the long run where you make intelligent choices based on the best information that you have at the time. This is not what speculation is. When you gamble, you will usually end up losing money. Speculation is no more than gambling. You are merely guessing what you think may happen without any kind of investment thesis. Instead, you are chasing emotion. This is a path that almost always leads to ruin. Even if you win in the short run, speculating almost always leads to losses in the long run. This is why you should not do it.
If you absolutely feel the need to speculate, make sure to keep a separate account with a different broker. This will lessen the temptation that you have to play with your investment money that you need for the future. Make sure that you are only playing with a small amount of your available money, and you can afford to lose every penny that you put into this account because you may.
