It’s easy to understand why so many people fancy their chances in the financial markets. It offers the chance to earn lots of money if done correctly and for some traders the reward is high while the working hours are relatively short. But for other traders, the experience is not the same – and problems, such as loss of capital, end up arising. This article will explain what pitfalls those who are new to the financial markets need to watch out for.

Risky investments

The first possible pitfall that a financial trader might face is, of course, the obvious one – that the value of an investment will go down instead of up. This happens in all sorts of asset classes, and it can be unexpected. There’s no guaranteed way to prevent this from happening, although it may be worth reducing your exposure to any one market by diversifying your portfolio as much as possible. In that way, you’ll cut the chances that your whole investment will be wiped out if one sector moves the wrong way.

Fraud and crime

Sadly, crime does exist in the financial markets – and everything from Ponzi schemes, in which the illusion of profit is created, to outright bank account interference are all risks. From a practical perspective, it’s a good idea to avoid anything with advertised returns that appear too good to be true. It’s also a good idea to ensure that any financial product you buy or broker you sign up with while trading is licensed by an appropriate body, which in the UK is the Financial Conduct Authority. While this does not guarantee that your experience will be fraud-free, it does mean that the chances are perhaps a little lower due to the increased oversight.

Mistaken asset classes

From a strategic point of view, perhaps one of the worst errors that a new trader can make is choosing the wrong asset class. Say you decide to enter the foreign exchange market: that move could work out if you’ve got some knowledge of currency markets, but if you find it difficult to intuitively understand concepts such as currency pairs then it may end up being a bad decision. As a result, doing your research into how each asset class functions and what it can offer is an essential move. Reading trading tips if you want to learn about CFDs is a wise decision, while those looking to enter the forex world could order a book on the topic.

What’s clear, is that there are plenty of potential downfalls to becoming a finance trader. From the risk that a legitimate investment will backfire to the chance that you’ll go for a fraudulent option or even the wrong asset class, there are lots of possible problems. But by doing your research and being proactive, it’s possible to give yourself the best possible chance of avoiding the common pitfalls that new finance traders can face.

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