Personal Finance

Common Mistakes To Avoid While Investing In Stocks5 min read

January 18, 2021 4 min read

Common Mistakes To Avoid While Investing In Stocks5 min read

Reading Time: 4 minutes

Investing in stocks requires one to consider a host of factors and deal with market changes. Such complexities might also increase your chances of committing errors. As a new investor, you should be aware of the common mistakes that happen and the ways to escape them to make the most out of your hard-earned money.

Here are a few investing mistakes that you need to avoid.

Buying on the rise & selling on fall

Often, investors tend to invest in stocks when the market is on the rise. Similarly, they begin to sell-off their holdings when the stock price begins to fall. Such practices seldom bring benefits to investors.

Instead, you may avoid taking bets as and when the stock price appreciates suddenly owing to some positive news, as the stock gets usually more expensive than it was earlier. Similarly, when the price of the stock that you own starts falling, don’t be in a hurry to sell it off. Also, examine the reasons that led to the fall and accordingly set a lower band. Once the stock is below that level, you may consider selling it off but not before that.

If a company seems growth-oriented and you believe that buying shares of that particular company might be profitable, then studying its growth prospects may help you to take a call.

Not doing research

If you are on the lookout to invest in shares, you may find a lot of advice coming from people around you. Additionally, you may even receive constant marketing emails or texts suggesting companies that you should invest in.

However, even though you may rely on these options, doing your own research and homework before investing in any company always helps. For this, you may look at the company’s source of revenue, its business model, and growth aspects.

Expecting sky-high returns in the short-term

As a new investor, you might come across certain misconceptions like money can double up overnight or make a fortune in the short-term out of investing in stock markets. This calls for you to exercise caution and hold realistic return expectations.

Investing in stocks is indeed one of the ways to create wealth, but for that to happen, you need to have an investment horizon of more than 5 years. Historically, the stock market has delivered above-average returns over the long run because of reduced volatility.

Not diversifying your portfolio

Putting all your money in a single stock may increase your chances of losing money due to high firm-related risks. Keeping your portfolio diversified, instead, is a key factor while investing as it helps to lower the firm’s related risks.

Diversification involves spreading your investments across a number of stocks and also across various sectors. With diversification, if one of the sectors is not performing well, the others might still perform well to keep your portfolio returns intact.

Not investing as per your risk appetite

It is true that if you stay invested for the long term and diversify your investment in stock markets then you can fetch a good return on investment.

But at the same time, you need to invest in stocks that suit your risk profile. Large-cap stocks have been found to face relatively fewer price fluctuations, thereby being less-risky. Small-cap and mid-cap stocks, on the other hand, might be an extremely risky investment for a beginner and you should maybe better-off by either avoiding them or investing in them at a later stage.

Investing from savings

Avoid investing out of your saving expecting that they would turn profitable soon. Pay all your bills first, set aside reserves for a rainy day, and invest the leftover funds.

By doing so you will not be in a hurry to exit markets and therefore you can stay invested for a longer period of time.

Falling in love with the company

When you research a lot about a particular company and decide to invest in it, avoid getting attached to it, because then it becomes harder to exit.

Many times it so happens that once you have formed a positive opinion about a particular company, you are likely to read articles, which validate your point of view and in this process, you tend to ignore negative news that is floating around.

This makes it difficult for you to objectively analyze and interpret data, which may lead to wrong decisions.

Imitating successful investor’s portfolio

All of us have role models in our lives and we may have different role models for different aspects of our lives.

Similarly, there can be people whom you closely follow like Warren Buffet, Rakesh Jhunjhunwala, or Porinju Veliyath.

But you must understand that imitating them or their portfolio may not help you totally. This is because when they started investing, it was a different time, the markets may have been different. Also, your risk appetite may not match theirs. Thus, you should make an informed decision and not imitate someone else.

Conclusion

These are a few very silly mistakes that a newbie investor might make. But if you consciously avoid them, it will be helpful for you in the long term. Being an informed investor and someone who researches well before making any decision will increase your confidence. At Paytm Money Stocks, you can invest in companies that you like in a completely digital and secure environment. Download the app today.