The open financial market remains an extremely fluid and changeable entity, and one that presents investors with the potential to experience both crisis and opportunity equally. The current market provides a relevant case in point, as although the eurozone crisis is forcing investors to trade cautiously and protect their interests, it is also offering them access to high yields and long-term gains.
So as the risk of investing in the developed eurozone market continues to rise steeply, the smart investors are the ones who react to this trend and target new investment opportunities and trading methods. The prevailing mood is now one of caution and consolidation, where investors are simply looking to retain their assets and not incur significant losses because of the eurozone crisis and its consequences.
Focusing on Individual Stocks Rather Than the Market
In fact, failing to keep pace with the malleable financial market is one of the most significant mistakes that investors make, especially in instances where they fixate on a specific stock, dividend or currency. This is because external social and economic factors can have a detrimental effect on the most secure of investment commodities, whether you have an interest in blue chip shares, products or an established currency, like the U.S. dollar. Even the low risk policy of dividend investment is not immune to market conditions, as although it can account for consistent and high-yield returns, there is no guarantee that mature blue chip firms will continue to thrive indefinitely in a flawed or afflicted industry.
Failing to Keep Pace with Technological Advancement
As with almost every major industry and niche sector, the financial markets remain at the mercy of technological advancement. The Big Bang of 1986 provided the major catalyst for this development and, more specifically, saw a narrowing of the gap between institutional and independent investors. With Direct Access Trading (DAT) offering increasingly affordable and accessible online platforms from which individuals can invest their capital, and mobile applications also making trading possible through smartphones and tablets, investors can ill afford to ignore the benefits of technology and the real time transactions that they help to facilitate. When it comes to both cost and financial return, traders must embrace technology to maximize their efforts.
Ignoring the Costs of Financial Market Trading
To laymen, the only obvious cost affiliated with financial market trading lies in the investment sum itself, but this is a naive outlook that could cost traders a significant portion of their eventual return. The fact remains that most types of trading and investment incur specific transaction fees, which is often paid as a percentage of the stake committed. When trading contracts for difference (CFDs), for example, you must allow for fixed and variable costs, including the spread, commission and other brokerage fees, as these are required to process your investment. While the application of technology can drastically reduce some of these fees, traders who neglect them completely often see their investments and long-term gains suffer considerably.
Following the Herd at the Expense of Your Own Instincts
Behavioral issues are not something that you would typically associate with trading and investing in the open financial markets, but they can in fact be highly detrimental to your chances of securing a sustained and high yield. The most significant of these is referred to as herd instinct, which is a state of mind whereby traders make their investment decisions based on the actions and opinions of others. After all, in everyday life, we rely on referrals and the advice of others as important reference points when purchasing items, and human nature dictates that investors carry this mindset into the financial market. It is important that as an investor you trust your own market knowledge and instinct, and react to market conditions rather than the words of others.
The Bottom Line
Whenever the financial market is enveloped by a prolonged financial crisis, an initial sense of panic descends as investors look to protect themselves from significant losses. This is largely misplaced emotion, however, as there is a far greater and more fundamental threat that faces investors on a daily basis. This is a lack of understanding concerning basic investment principles, which govern everything from the different methods of trading to the intricacies of all associated costs. Without this and practical experience of the financial markets, investors are likely to make fundamental errors that have a noticeable impact on their eventual returns.
More From Investopedia