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10 Mistakes a beginner should avoid

Hi there ,

Here is a list of faults that beginners in stock market usually commit. These are very common mistakes that eventually result in financial disaster. Investors who recognize and avoid these 10 common mistakes give themselves a great advantage in meeting their investment goals.

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Investor protection – Message from the Bombay Stock Exchange

The Investor Protection Fund of the Bombay Stock Exchange Ltd has laid out certain Do’s and Don’ts for investors to alert them to the attendant risks associated with trading in stocks.

DO’s

  • Always deal with the market intermediaries registered with the Securities and Exchange Board of India (Sebi) / stock exchanges.
  • Give clear and unambiguous instructions to your broker / agent / depository participant.
  • Always insist on contract notes from your broker. In case of doubt of the transactions, verify the genuineness of the same on the exchange Web site (http://www.bseindia.com).
  • Always settle the dues through the normal banking channels with the market intermediaries.
  • Before placing an order with the market intermediaries please check about the credentials of the companies, its management, its fundamentals and recent announcements made by them and various other disclosures made under various regulations. The sources of information are the websites of exchanges and companies, databases of data vendor, business magazines, et cetera.
  • Adopt trading / investment strategies commensurate with your risk-bearing capacity as all investments carry risk, the degree of which varies according to the investment strategy adopted.
  • Please carry out due diligence before registering as client with any Intermediary. Further, investors are requested to carefully read and understand the contents stated in the Risk Disclosure Document, which forms part of investor registration requirement for dealing through brokers in the stock market.
  • Be cautious about stocks, which show a sudden spurt in price or trading activity, especially low price stocks.
  • Please be informed that there are no guaranteed returns on investment in stock markets.

DONT’s

  • Don’t deal with unregistered brokers / sub-brokers, intermediaries.
  • Don’t deal based on rumours generally called ‘tips’.
  • Don’t fall prey to promises of guaranteed returns.
  • Don’t get misled by companies showing approvals / registrations from Government agencies as the approvals could be for certain other purposes and not for the securities you are buying.
  • Don’t leave the custody of your demat transaction slip book in the hands of any intermediary.
  • Don’t get carried away with onslaught of advertisements about the financial performance of companies in print and electronic media.
  • Don’t blindly follow media reports on corporate developments, as they could be misleading.
  • Don’t blindly imitate investment decisions of others who may have profited from their investment decisions.
  • For the benefit of investors, the exchange has installed a Toll Free line 1600 22 6663, wherein they can inform on any specific lead with regard to any type of undesirable trading practices in any scrip or any type of market aberration observed by them. Investors are hereby requested to get their messages recorded in English or Hindi. Identity of the investor will be kept confidential

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When to sell your stock

Since no one can time the market, knowing when to sell is one of the toughest decisions, especially since greed usually takes over and you always hope for a higher price.

In theory, the perfect business is to buy a company so wonderful and at a price so attractive, that we never sell it. Of course, this rarely happens in reality. Wondering why?

  • Because not all companies stay wonderful forever  and
  • The market at some point tends to grossly overvalue these companies, giving a sell opportunity.

PRE-DETERMINED RETURN

It’s better for investors to take a conservative approach. Consider selling your stock once you achieve a 20% to 25 % return on investment.

IS THERE A BETTER OPPORTUNITY?

If you have found a better company, where the probability of growth and returns is higher and if that company is available at an attractive discount, consider selling of your earlier investment at the available profit and invest in the new one.

SUDDEN CHANGES IN SCENARIO

Uncertainty is a part of stock markets. If there has been a sudden change in circumstance or you have received new information, that changes your opinion about the company that you once believed was wonderful, consider selling the stock; even though its current price may not have reached your target.

ACCEPTING LOSS

When you value a stock and invest at discount, it’s hard to get into a trap. However, I need to talk about accepting losses here. One of the hardest challenges an investor faces is accepting one’s loss and moving on before the situation worsens. It is much easier to sell and take profit than to sell and take a loss because it is emotionally far easier to leave a position with a win than with a loss.  However, this very behavior puts investors at risk and can quickly lead to depletion of his position.  Therefore, I argue that sometimes it is important to hold onto your stocks when they are going up beyond our target price, not because we are greedy, but because it is important to recognize a trend and take full advantage of the uptrend.  On the other side, it is absolutely critical to recognize the trend down and cut losses early regardless of how hard it is to accept a loss.

The Bottom line is –  don’t hold onto your position too long or too short.  Have a plan both ways and stick to it.

What i said above is not an easy thing to do, specially for fresh investors. Holding the stock beyond the target price and getting out of a position before it’s too late are vital decisions. The ability to take such decisions needs to b developed with time. For that you need through understanding about the particular stock and of the industry and economy in general.

Till my next post …

have a nice time !!

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Most common stock market mistakes.

1. TRADING TOO OFTEN

Beginner traders often buy/sell their securities too much. Generally, the only person who gets rich off of this is the investor’s broker. For example, if you have Rs 100,000 to invest, making 50 trades in a year at 0.3% would eat up Rs 30,000 as commissions. Even if you get 30% return from the market, you make nothing. In fact, if you factor in inflation, you lose money.

Trading frequently is also not tax inefficient, since these investors often end up paying short-term capital gains tax instead of tax free long-term capital gains.

2. INVESTING IN A SINGLE STOCK

Never put all your money in the same basket. You should learn to diversify your investments. At anytime, your investment bag should contain different companies from different sectors.

3. COMMITTING ALL THE CAPITAL AT ONCE

This is a really dumb thing to do; markets fluctuate up and down throughout the year, what if you end up buying the very top? It’s much better to plan ahead, and spread your capital commitment over 3 or 4 steps. Whenever you think there’s an opportunity, put 40% of your allocated money. The balance 60% should preferably be invested in 3 equal shots so that you can utilize all the dips in prices and you also bring down the cost. When you invest money in one shot and have no cash, you can’t take advantage of the market when it has a bad day. You are also more prone to panic selling and making other fear-related decisions.

4. INVESTING IN THE COMPANY THAT YOU WORK FOR

This is a dangerous thing to do; employees are often encouraged by their own employers to invest in the company they work for. Sometimes they even invest all their lifetime savings! The danger is that if the company goes bust, you will lose both your job AND your investment.

5. PANICKING

One emotion that’s detrimental to investors is fear. Yes, you should use caution and prudence when making investments. However, panicking whenever the stock market goes down never solves anything. Investors that are quick to panic often end-up buying high and selling low.

6.MAKING FINANCIAL DECISIONS BY TAKING ADVICE FROM FIRENDS:

What works for one person may not work at all for another.  Even beyond personal circumstances, the timing may just be wrong. For example, your friend might inform you about the latest hot stock in the market. He might have invested in it and his positions may already be in profits. By the time you enter, the prices may have peaked.

7. INVESTING IN TOO MANY STOCKS

Investing in too many stocks would also lead to confusion .You’ll find it difficult to follow-up with the companies.. If you want to diversify, it’s better to take the mutual fund route. If you end up investing in 50-100 individual stocks, effectively it becomes like your own mutual fund, but without the resources to adequately monitor the companies you are invested in. Diversification is necessary. But make sure you’re not over-diversified. A good portfolio would contain 10 to 12 stocks from various sectors.

8. UNCONTROLLED ENTHUSIASM

When we enter into something new, we will be over enthusiastic in the beginning and our enthusiasm level will drop as days go by. Especially so, in the case of stock markets. Beginners automatically get dragged into day trading before they gain enough exposure to the stock market. Over enthusiasm can work against you. Day trading requires a lot of experience to make profits. Even experienced traders tread very carefully when it comes to day trading.

9. INVESTING RISKY FUNDS

Never invest money you can’t afford to lose. There is no sure thing when it comes to making money with the stock market. You are allowing the risk to be too high if that loss of money is going to be a huge burden for your overall financial situation. I personally know people who have invested the money that they kept aside for their daughter’s wedding.

10. NOT HAVING A SOLID PLAN

You plan to fail when you fail to plan. Be prepared about how you will invest by having a solid plan of action. It is not possible for anyone to study all the thousands of shares that are being traded in the market. Naturally, you will see your friends making investing plans quite contrary to your views. Never deviate from that plan for your investments. Of course this doesn’t mean you are stuck with one method forever. Should you find that it isn’t working to make you profits you definitely want to step in and re-evaluate it.

11. POSTPONING YOUR INVESTMENT PLAN

Postponing the start of your investing until you have ‘extra’ money is a crucial mistake. This can cost you a lot because the value of money invested compounds across time. You also miss good opportunities to make money. Opportunities do come again in stock markets it may be better than the previous one you missed or worse.  But they are never the same. So it’s important to kick-start the investing process as early as possible.

12. CHASING PERFORMANCE


Many investors select shares based on recent strong performance. The feeling that “I’m missing out the opportunity” has probably led to more bad investment decisions than any other single factor. If a particular share has done extremely well for the past three or four years, we know one thing with certainty: we should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. This is the point where smart money moves out and the dumb money is pours in. Don’t be dump!

13. RELYING ON LUCK

Luck factor is very less in stock markets. Investing is all about your own strategies, hectic analysis, patience and the knowledge you have about the company in which you are investing. I know people who still use the same computer keyboard they started off with. (So that their winning streak continues!) .There are some others who wear stones and rings to help them get profits. Some guys trade only by positioning themselves eastwards. If strategies like that makes money for you, don’t look back. But I guarantee, it’s not going to work all the time. One day you’ll have throw those stones away. Do it now before it’s too late.

14.ENTRUSTING MONEY ON PROFIT SHARING BASIS

This one is so common- unofficially !! You may come across ‘experts’ who would offer to trade using your demat account on a profit sharing basis. Their terms are simple-Your money; his brain. Profit shared equally between . Do not get into such agreements with so called ‘experts’. You would ultimately end up losing all your money.

That’s 14 of the common mistakes. Have the 15th one? Send in.

Happy investing!

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