Unnecessary expenses on stock investment
It is common that people waste their money unnecessarily while trading. The transaction style is overly active therefore introduces overhead and useless in real trading. Most of those strategies are learnt from word of mouth and has no proof of correctness. Therefore I decided to list them here and made my own opinion to help readers maximising their profits.
This article will cover on some basic unnecessary expenses that occurred during investment and trading
Buy on the morning sell on the afternoon
This strategy is also called hit and run strategy. Where people buy stock on the morning and then selling it on the afternoon just before the market closed. This strategy works on bullish market, where the stock price will soar during the trading day. You'll get small but often profits.
Some stock broker recommend this strategy to maximise profit, e.g. by executing this strategy you will earn per share 200 + 200 + 200, totalling 600 per share minus commission.
Failure: This strategy will not work when suddenly the stock price tumbles down, where you will loose the hard earned money plus commission.
My opinion: This strategy only wasting money. You'll be ripped paying the tax and broker commission. How about the broker? He or she won't care about your financial situation, however one thing for sure he or she will be happy due to more commission from the client.
Buying on the afternoon sell on the next morning
This strategy focuses on minimising loss induced by stock market crash. This strategy works by assuming the stock price will fall less on the night time (after trading).
By executing this strategy you will minimise you loose from 800 per share down to 200 per share. Not a bad reduction, and some stock broker loves to recommend this strategy.
Failure: you will loose chance when the stock price suddenly soars.
My opinion is: this strategy will induce more broker commission and tax. It is better to use averaging down strategy in buying stock. Averaging down allows you hold stock while seeking for relatively low average price.
Buy and then sell when profit
This strategy is common among stock traders, and stock brokers loves it. Some people call this strategy riding the waves. Investor works by analysing the index or stock graph, then drawing lines such as support or resistant to make some conclusion from the graph to decide when to buy and when to sell a stock. Modern investor uses an advanced computer software to make the stock prediction.
Proof: this strategy really works and affect the stock market. This is due to well too many investor - may be 80% of the market - uses this strategy. They invests as collective mind, creating a major force on that is affecting the market.
Failure: sometimes investor were tricked to buy a 'saham gorengan' or a stock that is deliberately inflated. We'll buy something that worth below its price, e.g. buying 'sega kucing' for Rp 1.000.000,00.
Some speculators use margin to buy stock that they can't afford, then sell the stock before they pay any interest therefore generating profits. This strategy might be fine when the market is on bullish trend.
Failure: if the stock price tumbles down when the margin time finished, you will have two choice: selling stock on loose or the broker is more than happy to charge you with interest.
My opinion is: Never ever use margin while trading. If you can't pay the stock, then do not buy. The interest charged by stock broker is very high, and it is killing you.
Short selling is a strategy on bearish market. This strategy means selling something that you don't own. Which means if the buyer agrees on price higher than market price, you will earn money because you will buy the stock at market price and sell to the buyer at higher price. However you'll loose money if the market price soars high. Which mean you will buy something expensive to be sold cheap. There is no way to hold short sold stock. Therefore this strategy is more or less gambling. Don't do it.
Overly diversified portfolio
Diversified portfolio is fine, in fact it is recommended that investor has a diversified portfolio. However sometimes diversified portfolio reduces the increase of profits. That is due to choosing too much stock will lessen your ability to find the best available company, which means one stock might increase in price, and others might decrease.
If you are planning to diversify the portfolio, make sure to diversify it over time. Not in one day! Therefore the stock you choose is only stock from the finest company.
Moreover, overly diversified portfolio (20 or more stock) will lead to unnecessary broker commission.
Choosing expensive broker
Yes, this is also important. There are no significant difference between using expensive and cheap broker. As long as the broker is listed on the stock exchange and trusted, you can use it. Just choose the cheapest. My broker's commission fee is 0.19 and 0.29, which is one of the cheapest in town.
Moreover use online broker that won't call you on every stock movement therefore reducing your hyperactivity.
Buying a market timing program
Market timing program made decision on buying and selling stock based on technical data of a stock and index. Writing a market prediction program is a child's play for me. As far as I know, most market timing program could not work as intended. Those program costs a lot of money and their accuracy is at most 50%. If the market timing program were accurate, I'm sure there won't be version 2 of the program, since the programmer is a multi millionaire from stock trading.
Daily stock price movement is a random event that can't be predicted. However there is one thing that I believe will happen is, on one fine day the IHSG will eventually pass 10.000 mark. But when? Only God knows!
Therefore the bottom line of stock strategy is: choose a good healthy and well managed company to invest. Then buy their stocks when it is undervalued. To find whether a stock is undervalued or overvalued is by dividing the total company's net worth divided by the total number of stock available. That is the ideal stock price.