Stock trading is no longer restricted to financial institutions and hedge funds. With commission-free platforms like Robinhood and Webull, retailers can now participate.
A report from Statistica found that over half of all U.S. adults now trade stocks. Before jumping into the market though, you should take note of the biggest mistakes new stock traders make.
Placing Market Orders
One of the biggest mistakes new stock traders make is placing market orders. Whether you’re buying or selling a stock, you’ll need to place an order for it.
Most brokers support two types of orders: market and limit. Market orders are executed immediately at the best possible price, whereas limit orders allow you to specify a price.
The problem with market orders is that they don’t give you any control over the price. When buying a stock, market orders will be executed at the lowest price for which another trader is willing to sell the stock.
When selling a stock, market orders will be executed at the highest price for which is another trader is willing to buy the stock. Only limit order allow you to specify the price for which you want to buy or sell a stock.
2. Overlooking Liquidity
Share price isn’t the only thing you should consider when determining whether to invest in a stock; you should consider the stock’s liquidity as well. Unfortunately, many new stock traders overlook liquidity.
It’s not until they attempt to sell a stock when they realize the importance of liquidity.
Liquidity refers to the ease at which a stock can be traded without significantly affecting its price.
Stocks with poor liquidity are difficult to sell. If you sell a large number of shares, you’ll inadvertently drive down the price.