Millennial investors have significantly shifted from traditional savings options to share investment. They are willing to take more risks for more returns. There has been a surge in new investors in the past few years. Thanks to technology, stock market investments are no longer the realm of experts.
While we are all going to have our wins and losses when it comes to investing, new investors often make common investing mistakes that bring their journey to an abrupt end. Luckily, one can avoid those mistakes simply through awareness. Share investment isn’t rocket science, but it demands knowledge and skills that one can master through practice.
We will look at the seven common stock market mistakes committed by beginners and sometimes also by experts.
Investing in businesses that you don’t understand
Often, investors gravitate towards the latest trending stocks, even when they have very little awareness of the company or the sector, thinking it will help them earn massive profit.
However, these hot stocks result from rampant market speculation and are not based on the fundamentals of the business. You can avoid the trap by backing your investment decisions with research and fundamental analysis of the stocks on your watchlist.
Putting all eggs in one basket
Diversification is the foundation of responsible investing. It helps safeguard your investment so that when one of your assets underperforms, it doesn’t impact the entire portfolio. When you put all your investment in one stock or asset, the risk exposure rises.
There are two ways to diversify a portfolio. First, you can spread your corpus across different asset classes. One example is to invest in a mix of stocks, bonds, gold, real estate etc. Secondly, you can diversify within an asset class. Instead of putting all your investment in a single share, you buy stocks from different companies to spread the risk.
Constantly monitoring the market
When you should stay updated with the market news, it is easy to get swept by all the noise if you keep checking it for all ups and downs. The market is constantly moving. New investors try to time the market by continuously reviewing and changing their investments. But if you are in the market for the long haul, avoid reacting to short term news. Most asset classes tend to perform worse in the short run. Responding to negative news without understanding the context can lead to rash decisions.
New investors fall prey to get-rich-quickly schemes and lose money. Investment is a life-long habit and requires discipline and patience to ride over market volatility. If we compare the returns from stocks in the short-run and long-run, equities have generated more returns over an extended investment horizon.
Chasing the trend
Budding investors, even the expert ones, sometimes fall prey to chasing the trend trap in fear of FOMO. It is a practice of chasing the latest hottest stock without understanding its fundamentals. Always perform due diligence before investing. If you want exposure to trending companies, do it passively through ETFs and Mutual Funds that invest in such stocks.
Expecting too much from a stock
It is true with penny stocks. People often consider low-cost stocks as a lottery and expect these stocks to generate multifold returns. This is not a proper mindset when you plan to invest for an extended period. Always set your expectations right about the performance of the stock before investing. Although past performance is not an assurance of future performance, it is an excellent starting point for understanding the stock’s future potential. Always check the past performance of the stock you are interested in. You can use the historical data to understand the volatility and trading activities of the underlying share before investing.
Investing money you can’t afford to risk
People make the mistake of jumping into the market without analysing their financials. Your trading style changes when you use the money you can’t lose. Your emotion gets heightened, and the stress level increases. While selecting stocks, evaluate your risk tolerance – your ability to risk some or the entire amount for higher profit.
New investors are prone to make mistakes because they lack experience. Here is some advice that will enhance your experience in the market.
- Understand the market before you invest
- Have a clear investment goal
- Consult a financial advisor for professional advice
- Don’t invest based on hearsay or stock market advice received from social media or friends
- Before committing to an investment idea, perform due diligence
- Invest in mutual funds and ETFs for instant portfolio diversification
- Avoid over-diversification of the portfolio since it lowers your profit when one of the asset classes performs well
Investing involves risk. However, the biggest mistake is not investing or delaying to invest. It is essential to protect your financial future. One can easily avoid these beginner investing mistakes by analysing their financial goals and investment opportunities. New investors can easily avoid these pitfalls by exercising a little caution.
Disclaimer: Angel One Limited does not endorse investment and trade in cryptocurrencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.