While you’re investing in the Stock Market for the First time or as a Novice, try to Avoid some major and minor Mistakes that might help you not to get into any trouble. Let us discuss the Mistakes to Avoid in Stock Market in order to have a safe investment journey.
1. Profit Extraction
After you’re Invested for a certain period & Gain an amount of positive return, Most Beginners tend to chase behind the withdrawal of the Profit.
You need to know that movements in the Stocks are cyclical, They have ups and downs all the time, though if you stick invested for a longer timespan, invested money will gain itself via compound interest.
Now let us understand the Topic with a simple example. Suppose you have Invested 10,000 rupees in a stock that is providing a return of somewhere around 30% return in a Year.
Case of Withdrawal:
Your money is invested for a year, As One year is over now your capital is 13,000 Rupees. If you now take the profit of 3,000 Rupees out of the profit-generating system. You would be left out with 10,000 rupees again, Now repeat the same investing process for another year.
Another year passed, again you’ll generate some profit out of your investment, now again the capital is 13,000 Rupees. So, 2 years later you have a total amount of (13,000 + 3,000) = 16,000 Rupees.
Case of Holding:
Again the same scenario is being considered. Though, in this scenario, we won’t be taking out the profit from the total revenue.
One year later your 10,000 has now turned into 13,000 at a rate of 30%. Instead of withdrawing the profit, We keep it untouched & invested for another year.
Second-year has arrived, Now the Total return you have achieved is 3,900.00 Rupees. Thus your total amount is now 16,900.00 Rupees. Thus you have come across an extra profit of 900.00 Rs.
Imagine reflecting this example on a large amount of investment. You’re only one step away to decide if you’ll be making a huge difference in your probable return.
2. Always Analyze
Analyzing is one of the most important steps to follow if you’re willing to buy stocks legitly. You can use Free Tools like ‘Screener‘ or ‘Ticker‘ to analyze any stocks and all related useful info about them. Thus you can decide if the stock is beneficial for your portfolio or not.
We have created a separate tutorial where you can learn the basics of Fundamental Analysis, and Learning if a Stock is beneficial or not.
3. Hopping on Hype
Even if you read in the newspaper or saw on Television that a specific stock will catch a certain Value. You should not Hop on to purchase the stock all of a sudden before knowing the fundamentals of the IPO as well as the Company.
While others are selling or buying Based on Recommendations, you need to be careful. Do not always follow along when the majority of the market is making decisions without paying proper attention.
4. Never Borrow to Invest
One of the major mistakes beginners tend to make is that they Borrow Money or take loans to Invest with an assumption of Overtaking loan interest by countering it with stock’s return Percentage.
It is one of the biggest Misconceptions and one needs to stay away from it at any cost & if you’re are a beginner who’s not completely aware of all basics, Be careful.
While you’re thinking of generating a Higher amount that can counter the Interest percentage of the Loan, You can get in the loop of EMI, Lower Interest rate, Market Crash, and some serious issues.
Always try to invest the money that you already have and you can afford to lose. Once you’ve invested, do not think of it again in the next several years.
The Concept of Borrowing to Invest in Stocks may differ or Intraday Trading as it has the concept of Margin and ROI.
5. Single Basket
The very first thing to learn is, Never to put all your eggs in one basket. Let’s suppose you have 1 Lakh Rupees to Invest in Stock Market.
You have two basic options, You can either buy stocks of a single company that’s priced 500rs. each. You’ll have 200 of them upon purchasing, or you can invest in 5-10 companies with different price Range of each stock, completing a total of One lakh. Let’s analyze both scenarios…
Assuming a scenario that you’ve invested One Lakh in just a Single Company, After 15 Years if the Company performs well, it can generate 4-5 times of your initial Investments, thus putting you in a huge profit.
But if the company somehow struggles in any phase, You have a higher chance to lose all your Investments and Potential profit gains. All this could happen just because you took the risk to invest just in a Single IPO & this is one of the major Mistakes to Avoid in Stock Market.
Now in this scenario, You invest all your money in a bunch of stocks, or some handpicked, analyzed stocks so that your portfolio is diversely spread.
Even if after 15 years, some companies from the portfolio list get into huge loss, you will still have a mass profit from the other companies too, in which you invested the rest of your Amount.
Thus Investing via a Diverse Portfolio can Generate a safe as well as a higher revenue source and has the ability to tackle sudden market crashes.
Quick Tip: If you want to Create a Properly Diverse Portfolio of Investments, You need to consider other forms of investments like Bonds, Gold, Commodities, ETFs, Real Estate, etc.
6. Emotional Investment
Before buying a Stock you must analyze the fundamentals of a company, if found worthy & strong enough to generate revenue in the future, You invest in it.
Though everything seems to be going fluent, you’ve been following the “Buy right, Sit tight” rule. All of a sudden you notice that the company is rolling major changes by compromising their fundamentals that you think might affect negatively the capital gains.
It’s better to withdraw investing further in the IPO, after facing a couple of red flags with the specific company. Instead, if you choose to stick invested with the company whose strong fundamentals are being compromised can lead you to a lack of further profit generation.
It is known as Emotional Investment in the stock market, emotional Decisions of investing can cause financial disaster, thus you need to treat Financial emotions with seriousness.
7. Trading Mindset
It’s really hard getting too far in Investing while having a quirky Mindset pulling you to Trade your investment in the Short Term. A Trading Mindset can not tackle market ups and downs providing a positive return majority of the time.
In the previous article ‘How to Start Investing in the Stock Market as a Beginner‘, I explained what is the basic difference between Long term investment & Intraday Trading. Which one is more useful for Investment purposes, risks comparisons & Benefits.
Thus you need to get rid of thoughts related to early redemptions, as they are one of the most important investment Mistakes to Avoid in Stock Market.
So these were ‘7 basic Mistakes to Avoid in Stock Market’ is you’re just getting started in the Stock market. We have included the most basic factors you need to know, though there are numerous corrections that you’ll learn as you grow in the market environment.
I hope you liked our Article explaining ‘Mistakes to Avoid in Stock Market’ very much, Thank you for reading, Have a nice day, Happy Investing!