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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3 Responses to “Most common stock market mistakes.”

Janessa

November 4, 2011 at 6:03 am

It’s about time smoonee wrote about this.

Chaitanya

March 15, 2013 at 10:53 pm

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Jayapratha

February 3, 2014 at 1:35 pm

This is the best site to study about investing. Thanks Victor for making it available to everyone for free.

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