Why Stock Investing Is Not a Get Rich Quick Scheme

If you are like me, you most probably started dabbling in the stock market with the assumption that it will make you rich almost immediately.  Most people dive into the stock market with extreme optimism only to find out the hard way that having a higher than average ROI is not as easy as it seems.

If investors such as Warren Buffet and George Soros only make an average return of 20% per annum, what makes you think that you can beat these guys?  Today, we identify the top reasons why you won’t be getting rich quick in stock investing.

Read Also:  Understanding Investors Emotions to Make Better Investment Decisions 

(1) Commission Fees

Many young adults jump into the stock market without considering the commission fees.  For every trade you make on the stock exchange, you have to pay a commission fee. While the commission rates may vary across the different brokerages in Singapore, the expenses incurred on these commission rates can be extremely high if you plan to buy only a few shares of stock.

Compare commission fees per share you incur if you buy 10,000 shares of Challenger Technologies Limited at $0.45 against 100 shares of Challenger Technologies Limited at $0.45.

Based on the table above, you will incur $0.126 and $0.25 commission fee per share for 10,000 shares and 100 shares bought respectively.  Imagine the cost that you incur from transactions itself when you make many transactions of 100 shares instead of one 10,000 shares transaction.

That being said, whether you should break up your transactions or to lump them all into one is entirely dependent on your investing strategies adopted for your financial portfolio.

(2) Not Understanding Market Timing & Behaviour

Yes, you have done your all your research. You have finally evaluated and firmly believe that Company X is definitely a must buy.  However, it is important to know that the market moves in cycles.  Unfortunately, many investors overlook this very important factor.

If the market is exceptionally bearish, the money that you invest in the stock market will definitely not give the most optimum returns.  In other words, you have to understand when is the best time to jump to commit to a position.  While the company may be performing exceptionally well, the prices of the shares may not be optimal due to investors’ perception of the economy.

Timing is extremely crucial when investing in the stock market.  Knowing when to enter the market may just save you from losing money unnecessarily.  Investors who know when to enter or exit a market, usually have a portfolio that performs better than those of ignorant investors.

Understanding market timing is also the reason why some day traders can be so successful.  By analysing the trends of the prices of the day, they are able to forecast the performance of the shares in that particular day.  This ability to discern when to enter or exit a position is the reason why some day traders are so outstanding.  In fact, many experts urge investors to utilize technical analysis to enter or exit the stock market.

(3) Not All Cheap Stocks Are Good Stocks

Many investment tips given by “investment gurus” and “experts” often claim that the easiest way to get rich fast is to buy cheap stocks!  When you buy a cheap stock, it is important to distinguish undervalued stocks from stock market losers.

Although some stocks in the market have the potential to give you good returns, most of the cheap stocks in the market are the losers.  Based on market timing, there are times when the stock market is like the Great Singapore Sale (GSS). However, you don’t have the GSS every day.  More often than not, stocks are sliding for a reason.

When you want to buy a cheap stock, make sure you know that it is undervalued fundamentally based on the industry’s average.  Have the figures to support your decision before you commit to a buy.

If you do not do your homework and assume a cheap stock is going to rebound and give you a good return, you are making a very poor decision. When that happens, it will be of no surprise that your capital takes a nasty hit.

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