More people are investing thanks to commission-free apps such asand Webull, but there are risks involved in playing in the stock market. Some have benefited from the , while others lost more than they expected. That money may have run out now, but it could come back with a better investment strategy.
Since the beginning of February, GameStop and other meme stocks have only gone downhill, with the exception of theRather than liquidating your entire portfolio and just treating it as a loss, it is possible to turn the negative into a positive by following a few simple steps.
Don’t chase your losses
As with gambling, there is an urge to get your lost money back quickly. In the case of investing, this could mean investing or even borrowing more money to make one or two big moves that you hope will get you back on the positive. This can be dangerous.
“If you think an investment is worthwhile and you have the venture capital, you should do it,” said John Payne, senior futures and options broker at Daniels Trading in Chicago. “But never go it alone to recover from what you lost in a previous trade. Every market decision must be independent of the previous one.”
Even though you may have lost a lot of money quickly, it may take some time for your portfolio to turn positive again – and that’s okay. It may take months for you to recover, but chasing the money that has already run out could put you in a deeper hole.
Resist investing FOMO
Professionals recommend that you separate emotions and impulses from investment decisions. Fear of missing out, or FOMO, is hard to resist, but it can be costly when you give in to it.
“A lot of people saw these stocks go up and also saw a lot of their social media feeds making money, so they jumped in,” Payne said. “I imagine many will talk about how much money they have made, while others will have to bear the losses.”
Experts suggest making decisions based on the data you have. Find out where you put money in and why. While the GameStop example contradicts this, fundamentals and financial data usually matter to a stock’s value. Don’t throw money at a stock just because it’s popular on Twitter.
Segment your portfolio
Diversifying your stocks is one thing professionals say is key to making a profit in your portfolio. Everything in GameStop, or any other company, is a dangerous risk.
“Rather than thinking of your entire investment account as one ‘big’ pie, ” divide it into two or three slices,” said Farron Daugs, CEO and founder of Harrison Wallace Financial Group.
Daugs says it has a portion of your portfolio for long-term investments that you want to keep for years to come. Another part should be for stocks with a slightly shorter term, such as one year. If you can, play a third role, with money you use to play with stocks that are doing well in the short term, such as a few months or weeks.
Understand why a stock is ‘in play’ and moving quickly
The stock market can be confusing, but changes usually happen for a reason (although it may not be that obvious at the time). A sudden spike in a company’s stock price can be linked to a particular piece of news that caught investors’ attention. Learning about those bits of data is important to get positive again.
“Understanding why a stock is moving also gives you a better idea of the risks involved in buying the stock,” said Daugs.
GameStop’s rise was atypical. It was unprecedented and something you couldn’t predict just by looking at the data. In his testimony to the House Committee on Financial Services, Robinhood CEO Vlad Tenev said the stock’s performance is referred to by analysts as an event of five standard deviation, or five sigmas, and has a probability of about 1 in 3.5 million. Overall, the company was fundamentally underperforming, trading between $ 15 and $ 20 a share in early January. When the stocks exploded, people jumped up not knowing that some hedge funds’ confusing play acted as a catalyst. Some people did not see that this was going to be a really short roller coaster ride.
“Typically, these stocks don’t move because all of a sudden they’ve improved their business and are expected to be more profitable,” said Daugs. “These are moving trains that can jump off the track quickly. You don’t want to be the last, because eventually stocks will return to their ‘true value’.”
Don’t be too greedy
There are no guarantees in the stock market. The fall in meme stock sums up that point perfectly. There just comes a point when you need to show some discipline and not be greedy.
“Be disciplined and have a sales strategy,” said Daugs. “Keep a price in mind for both the possible up and down sides of your inventory.”
If you find yourself in a situation where you’re grown up, always be ready to hit the brakes if it looks like it’s heading south. Nothing is gained by holding a stock that tends down longer than everyone else.