Stock: 10 Common Mistakes to Avoid in Stock Trading

The following list of 10 typical stock trading blunders is exclusive to the Philippine market:

Lack of Research Error

One of the most common mistakes among Filipino investors is purchasing stocks without conducting proper research. Many investors base their decisions on tips from friends, family, or social media influencers rather than performing their own due diligence. This lack of research can lead to investing in overhyped or fundamentally weak companies, which may result in significant losses when market conditions shift.

Solution: Investors should conduct thorough research before buying any stock. This includes analyzing a company’s financial statements, management team, industry position, and future growth strategies. Reliable sources such as market research reports, financial news websites, and the Philippine Stock Exchange (PSE) website can provide valuable insights. By understanding key financial indicators like revenue growth, debt levels, and earnings per share (EPS), investors can make more informed and rational investment decisions.

Emotional Investing Error

Investing based on fear, greed, or market hype often leads to poor decision-making. Some Filipino investors panic sell when stock prices drop, fearing further losses, even when the company remains fundamentally strong. On the other hand, some investors chase overpriced stocks during bull markets due to fear of missing out (FOMO), leading to buying at inflated prices.

Solution: It’s essential to develop a disciplined investment plan and stick to it regardless of short-term market fluctuations. Setting clear entry and exit strategies based on risk tolerance and financial goals can help avoid impulsive decisions. Additionally, adopting a long-term mindset and focusing on fundamentals rather than short-term price movements will lead to better investment outcomes. Learning to control emotions and avoid reacting hastily to market noise is key to success in stock investing.

Overtrading Error

Some investors believe that frequent buying and selling of stocks will lead to higher profits, but in reality, excessive trading often results in high transaction costs and reduced overall returns. Many Filipino traders, especially beginners, engage in overtrading due to the excitement of market fluctuations or the misconception that more trades mean more profits. However, short-term trading increases exposure to market volatility and unpredictable price swings, making it difficult to sustain consistent gains.

Solution: Instead of focusing on the number of trades, investors should prioritize the quality of their investments. A well-thought-out long-term investment strategy is often more effective than frequent trading. Investors should conduct regular portfolio reviews to ensure that their stock holdings align with their financial objectives but should avoid reacting impulsively to short-term price movements. Being patient and allowing investments to grow over time is often the key to building sustainable wealth.

Ignoring Diversification Error:

Investing all your money in a single stock or industry exposes your portfolio to significant risk. If that particular sector experiences a downturn, you could suffer heavy losses. For example, if the real estate market declines, an investor with a large portion of their portfolio in property stocks might face financial setbacks. Similarly, over-reliance on one company—even if it’s a well-established firm—could lead to substantial losses if the company underperforms.

Solution: To reduce risk, investors should diversify their portfolio by spreading their funds across various sectors, asset types, and geographical markets. Consider investing in a mix of growth stocks, value stocks, bonds, mutual funds, and exchange-traded funds (ETFs) to create a well-balanced portfolio. Diversification helps ensure that a decline in one investment does not have a disproportionate impact on overall returns.

Chasing High Returns Error:

Many Filipino investors chase stocks with recent strong performance, assuming that the trend will continue. This is often misleading because past performance does not guarantee future success. Investors may get caught up in market hype, purchasing stocks at inflated prices, only to experience sharp declines when the excitement fades.

Solution: Instead of focusing solely on recent price surges, investors should evaluate a company’s fundamental strength. Look at key indicators such as earnings growth, competitive advantage, management effectiveness, and long-term business strategy. A company with strong core fundamentals and consistent financial performance is more likely to provide sustainable long-term gains than a stock that has simply risen due to speculation.

Ignoring Risk Management Error:

Failing to apply proper risk management strategies can result in substantial financial losses. Many investors in the Philippines do not set stop-loss orders, fail to rebalance their portfolios, or take on excessive risk without considering the potential consequences.

Solution: Effective risk management involves regularly reviewing your portfolio’s exposure and implementing strategies to protect capital. Some key risk management practices include:

• Setting stop-loss orders to automatically sell a stock when it reaches a predetermined loss level. This prevents excessive losses during market downturns.

• Allocating investments based on risk tolerance—younger investors may afford more risk, while retirees should focus on capital preservation.

• Reviewing and rebalancing portfolios periodically to maintain the right asset allocation in line with financial goals.

• Considering defensive stocks, such as consumer staples or utility companies, which tend to be less volatile during economic downturns.

Ignoring Market Factors Error:

Neglecting broader economic and market conditions can significantly impact investment outcomes. Filipino investors sometimes focus solely on individual stock performance without considering the bigger picture, such as interest rates, inflation, foreign exchange fluctuations, and political stability. For example, rising inflation rates can erode purchasing power, while changes in government policies can heavily influence sectors such as infrastructure, energy, and finance. Ignoring these factors may result in unexpected losses or missed opportunities.

Solution: Stay informed about local and global economic developments by regularly following financial news, reports from the Bangko Sentral ng Pilipinas (BSP), Philippine Stock Exchange (PSE), and other regulatory bodies. Pay attention to GDP growth rates, monetary policies, corporate earnings reports, and geopolitical tensions. Incorporate these insights into your investment strategy, adjusting your portfolio based on evolving economic conditions.

Herd Mentality/Following the Crowd:

Investors often fall into the trap of herd mentality, where they blindly follow popular investment trends without conducting their own research. This behavior is especially common in the Philippines, where many investors rely on tips from friends, online forums, or social media influencers rather than analyzing a stock’s intrinsic value. As a result, they may buy stocks at overinflated prices, only to suffer losses when the hype fades.

For instance, during market rallies, many investors rush to buy popular stocks without assessing whether the company’s fundamentals justify the price surge. Conversely, during downturns, they may panic-sell at a loss, further exacerbating the negative impact on their portfolio.

Solution: Develop an independent investment strategy based on thorough research and analysis. Instead of making impulsive decisions, focus on financial statements, industry trends, competitive positioning, and growth potential. Utilize resources like fundamental analysis, technical indicators, and earnings reports to assess a stock’s true value.

Additionally, stick to a well-defined investment plan that aligns with your financial goals and risk tolerance. Avoid making decisions based on market noise, and trust your own research and judgment to guide your investments. By staying disciplined and objective, you can avoid costly mistakes and improve your long-term financial success.

Ignoring Financial Objectives Error:

Investing without well-defined financial objectives might result in aimless trading and erratic profits. Filipino investors may not have a defined investment goal in mind.

Solution: Identify your financial objectives, including long-term ones like retirement planning and short-term ones like saving for a big purchase. Match your investing approach to these objectives, and evaluate your results regularly.

Underestimating Costs Error:

Underestimating the impact of transaction costs, taxes, and fees can negatively impact investment returns. Filipino investors can ignore how these expenses impact their total profitability.

Solution: Recognize all of the expenses related to trading, such as taxes and brokerage fees. Consider these when making investment selections, and try to cut back on needless spending.

A multi-award-winning blogger and advocate for OFWs and investment literacy; recipient of the Mass Media Advocacy Award, Philippine Expat Blog Award, and Most Outstanding Balikbayan Award. Her first book, The Global Filipino Bloggers OFW Edition, was launched at the Philippine Embassy in Kuwait. A certified Registered Financial Planner of the Philippines specializing in the Stock Market. A recognized author of the National Book Development Board of the Philippines. Co-founder of Teachers Specialist Organization in Kuwait (TSOK) and Filipino Bloggers in Kuwait (FBK). An international member of writing and poetry. Published more than 10 books.  Read more: About DiaryNiGracia