‘Invest with us to multiply your money.’ You might have come across such advertisements hundreds of times and felt tempted to become rich overnight! And, if you are a first-time investor, it’s natural to get pushed over by such ads.
But, before you start investing, you should know what you are getting into. Many novice investors jump to the investing decision hastily, commit mistakes, and incur big losses. Here, we will tell you the five most common stock market mistakes and how to avoid them-
Investing Without Basic Knowledge
One of the most common mistakes the first time investors make is simply investing in stocks without any prior knowledge. They tend to pay exaggerated prices for the stocks as they don’t know the key figures and buy or sell the stocks at the wrong time.
But, buying or selling stocks without basic knowledge poses the risk of losing a lot of money in the market. This means you shouldn’t invest in a company if you don’t understand the business models. Make sure to check that each company the individual stocks represent before you start investing.
Expecting Too Much Too Quick
Many people think that once they invest in stocks, everything will be perfect. Remember, simply investing in stocks isn’t going to solve your financial problems. Don’t think that you will beat the returns overnight.
So, have realistic expectations. Just understand what the stock market does, not in a year, but over a lot of years. And base your expectations on these numbers.
Chasing The Returns
Chasing returns while buying a stock is another common mistake inexperienced investors make. You need to keep in mind that the stock market has its own journey of ups and downs. Investing in a stock because it is giving high returns at a particular period of time might land you into a wrong investment.
Do a thorough study about the company, its growth, business model, management, and other things before investing in it. Sometimes, a company that fails in these factors might have also seen high valuations in its stock. Don’t invest blindly.
Even if you are planning to invest in tech giants like Microsoft, look at the Microsoft stock forecast and then decide if they should be in your portfolio. It will help you make an educated decision.
Getting Emotionally Attached With A Company
Often, when you see a company doing well, it is easy to fall in love with it and ignore the red flags. No doubt, ‘buy right and sit tight’ is true; it is necessary to keep your eyes open to see if any fundamentals are being changed.
Look out if a senior leader exits suddenly, or if the non-performing assets are going up, etc. If you find it difficult to do this on your own, talk to a financial advisory and make a wise decision.
Buying Shares On Credit
Many professionals in the stock market buy shares on credit. They borrow cash from a bank or broker and sell it again when the share price goes up. This way, they take care of their debts.
But, if the share price doesn’t increase and falls, instead, they have to pay more money to the bank. This ‘margin call’ leads to huge losses that are far more than the initial investment amount.
Furthermore, many investors borrow money from their friends or family for buying shares. If the stock investment happens to be unsuccessful, they are left with broken relationships. Thus, as a private investor, you should stay away from trading on credit.
So, How Can You Avoid These Mistakes?
Below are a few tips to avoid these mistakes and keep yourself on track-
- Create a good plan of action. Think about why you are investing your money, what your goals are, and how much do you need to invest. Look at stock return history and have realistic expectations.
- Review your investment and performance once the income grows.
- Set a limit to determine when you will walk away.
- Invest only what you can afford to lose.
Though mistakes are an inevitable part of the investing process, knowing what these mistakes are and how to avoid them can help you succeed. Create a systematic plan and stick to it. If you want to try something risky, have some fun money that you are prepared to lose.