Meme stocks underscore importance of financial literacy in investing

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The availability of Robinhood and other trading platforms has undoubtedly drawn many into the idea of managing their own financial destiny. Numerous successes over the last year can be credited to similar platforms and apps that provide a means for the average person to create additional streams of revenue by investing in the stock market. Social media such as Twitter and Reddit have also contributed to the availability of information for those learning how to invest and for the public exchange of financial ideas in the marketplace.

Warren Buffet once said, though, that “risk comes from not knowing what you are doing”. Gamification and the ease of using apps with access to complex financial instruments designed for novices and one-click trading preferences presents substantial risk. In days past, financial success was enjoyed by accredited investors who presumably had enough knowledge to assume all the risks involved. Those looking to enjoy the same level of success should realize that investing one’s income and savings in hopes of a future return should be undertaken with more careful thought. The GameStop debacle — in which a so-called “meme stock” promoted on social media led to initial trading gains followed by a sharp drop in value — is proof that more education is needed now for those attempting to access the financial markets with a new genre of investing apps and user-friendly technology platforms.

There are three basic overlooked areas where new investors should seek to educate themselves. Discussion around these underestimated pitfalls has been omitted from all the buzz around taking advantage of good market conditions and easier access to investing.

The first is emotion: For starters, we are humans and prone to follow emotion. Emotion though, can be your enemy when trading. Doing the right thing while trading may even seem counterintuitive, and only those who have familiarized themselves with the markets and their technical nuances are able to overcome the temptation to be led by emotion. This is especially true for beginners. Vertigo can occur quickly as executions need to be made with a knowledge of “exact science” as well as understanding the art of interpreting the underlying factors that contribute to technical patterns and trends. You will be able to manage your emotions and rationalize your decisions by learning the principles that form the basis for successful trading. Greed and the intoxicating effect of early success can propel you into overinvesting, leading to losses when a more disciplined approach is called for.

Navigating volatility: Volatility provides the greatest opportunity to gain if it’s navigated correctly. Experienced investors know the past does not predict the future, and interpreting volatility is a skill that takes time and practice. Practice makes perfect, but in this case perfect practice is required to avoid costly mistakes. Specifically, trading the VIX can be extremely profitable but also comes with less understood irregularities. Learn how to properly work with the VIX or be VEXED — trades in this category require back-tested systematic and statistical interpretations that are best learned from vetted leaders and teachers. These positions require timed entry and exit moves and can be a minefield without the right knowledge.

Unreliable sources of information: The internet is littered with examples of those who inspire the mentality that everything can be done quickly and without much investment in time or training. It’s easy to talk about the gains and strong upsides without talking about the many losses incurred along the way. How many YouTube videos have you seen with someone standing on a beach with their favorite beverage touting the quick gains they achieved while inviting you into their success and company for a fee? They may even give you their credentials and explain the job they dumped as a top analyst at J.P. Morgan or another financial institution. Get real. These hoax organizations are not going to do much for your long-term success. The clock strikes 12 two times a day and, without real knowledge, don’t expect to gain more than you painfully lose because you were deceived by a get-rich-quick scenario. Dark pools are also sources of corrigible information. Opaque at best, these resources are not to be relied on.

The bottom line is there are distinct advantages for individual investors who strive to increase their financial literacy by pursuing education and knowledge. The collective wisdom of Grantham, Buffet and the most successful investors of our day all warn about following the crowd. While one tip from a Twitter site can make a splash of cash, educational development and the tutelage of those with enduring back-tested strategies, can place you on a path to disciplined and sustainable financial success. The resources you rely on will ultimately create your financial investing destiny.

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