To become a stock market investor, it is vital for a person to be level-headed and logical. He should be able to think and make decisions on the go. The investor must be able to juggle between his rational thoughts as well as his gut instinct.
Here are 15 mistakes that investors make on the stock market:
1. Having no plan
An investor with no plan does not know what he wants. Investments are undertaken in order to finance or accomplish something. In order to invest properly, an investor should know what he is trying to achieve. He needs to have a reason he is investing for. For some investors this can be for the retirement, for some it can be for the children's education, but there are also who are willing to invest for a short-term goal such as a vacation. Having a plan helps the investor to decide in what type of securities he must invest in, how long he should invest and how much he should invest in order to get the expected return that he wants.
2. Going with the market trend
Some investors give too much importance to what is being written in financial media. They almost always refer the Financial news before making any investment. By investing in this so-called fashionable securities, investors fall into a trap of speculation and when the speculative bubble bursts, investors lose a huge chunk of money. Rather than just going with the market trend, investors should also do self-study before believing the trend.
3. Not creating a Portfolio
An investor's biggest strength is his portfolio. To be able to diversify the portfolio will help him in cutting his losses and maximizing his returns. The aim of a Portfolio is to hedge risk, not to completely nullify it though that is a good thing. Every investor says higher the risk higher the reward. This is not always true. So to avoid this, the creation of a good Portfolio is important.
4. Depending on the investment manager
Having confidence in the ability of the investment manager is good. But it is not right to always depend on the manager for every investment that one is making. This may lead to an investment mistake.
5. Only investing in high performing securities
Just because it is performing well in the past year doesn't mean that it will continue performing the same way in the future as well. Before investing, only checking how securities are performing is not enough. It is important to understand how the company you are buying the shares has performed based on its profit/ loss statement, balance sheet, and cash flow statement. And also to understand how will the company be utilizing the funds it raises.
6. Disposing stocks when prices are falling
It is a common practice among many investors to dispose of their stock when the prices start to fall. This may lead to a lot of loss. For example, when Satyam shares began to fall, many investors sold the shares they held. Some of them held on to it instead of selling them instead they bought more shares at a lower price. This is why they cut their losses when Mahindra took over Satyam. On the other hand, the investors who sold their shares ended up with a huge loss. So it is important to understand how the fundamentals of a company are. Maybe the price fall is only for a short time because of some macroeconomics factor or because of some negative news about the company. That does not mean that the company will perform badly in the future. If fundamentals of the company are strong, you should hold on to the stock even though prices might be falling.
7. Investing like gambling
Gambling doesn’t follow any rules. Some investors invest in securities like they are gambling. They randomly pick a security and if they feel it is doing well, they invest in it. This is one of the big mistakes when it comes to investing.
8. Assuming to attain the same profit as others
Some investors look at other investors and in what securities they are investing in and try copying it because the combination seems to be working for that other investor. This may not always work because the ratios within the combination, that is the number of securities per company, may vary completely. Just because another investor is making a profit using a particular combination, does not give sure chance of profits.
9. Being anxious or worrisome
Just because an investor makes an investment he should not keep checking the ticker or the index. This is one of the emotional mistakes that an investor does. It just leads to more anxiety and does not give the required result.
It is often thought that an investor trades a lot. In reality, the investor does not trade as much. It is also important because by trading a lot, an investor loses money in fees. Conducting a few trades within which the investor is able to diversify his risk is the ideal scenario.
11. Having no liquidity in the portfolio
It is important to have a few liquid assets or securities in the portfolio so that the investor does not go broke. It may happen that an investor has his major portfolio as illiquid and in case of an unexpected market crash, he may not be able to liquidate holdings immediately. So it is important to have good liquidity in the portfolio.
12. Investing in short-term
Traders face liquidity problems more compared to investors. The time period of an investment is what differentiates a trader from an investor. Traders depend on the momentum of the market whereas investors depend on many factors such as market trend, company background, and their portfolio. It is always possible to earn more profit in the long-term and not in the short-term.
13. Investing without research
Just because somebody advises you to invest in a security,it does not mean you blindly go and invest in it. It is important to study the company, the shares and the performance in the market before going forward with any investment.
14. Investing with unrealistic expectations
It is important to have expectations which the investment can fulfill. Having unrealistic expectations may lead to disappointment for the investor.
15. Getting Greedy
In order to invest, it is important to have confidence in the shares. But once the shares start doing well some investors put all their eggs in a single basket. In the name of diversification, they have meager amount invested in other securities. This may cause some serious damage if the investor is wrong. Therefore, it is not good to become greedy.
So, we promised 15 mistakes, and here is a bonus 16th mistake:
16. Investing with money that cannot be spared
It is always important for an investor to invest the money that is disposable. Any sum left over after meeting the needs of the investor and savings is what should be used in investment. It is important not to invest with money that the investor cannot part with.
Check NSE Academy Certified Capital Market Professional (E-NCCMP) for staying away from mistakes.
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