- Novice investors often face difficulty in understanding the ebbs and flow of the stock market, which results in some common investing mistakes.
- Investors can minimise the risk of loss by staying vigilant and learning from the experience of seasoned investors.
- Some common mistakes include investing without a motive, following trends blindly, not diversifying one’s portfolio and using high-interest credit to trade.
The notion that fool-proof investing requires knowledge about the stock markets and years of trading experience echoes extensively in the trading arena. While some of it is true, one should understand that even the most seasoned investors can fall prey to some common investing mistakes and land into a streak of bad investments. Therefore, investors must be cautious of the stock market blunders to prevent potential losses.
Novice investors, who are still in the process of understanding the ebbs and flow of the stock market, undergo extreme pressure to perform and make gains. Moreover, individuals with a relatively smaller trading history usually find themselves competing with experts and get intimidated by the latter’s actions.
GOOD READ: 9 Investing Tips for Beginners
However, being watchful of key investing areas can help investors steer clear of any risky ventures. Meanwhile, they can minimise the risk of loss by staying vigilant and avoiding key investing mistakes. Here are seven such mistakes that investors should dodge while investing in the stock market:
Investing without a motive
As with any daily activity, goal setting is a highly effective practice while investing in stocks. The lack of a predetermined target creates room for losing interest in the stock market and can eventually result in losses of high magnitude.
While investing with a dedicated objective, investors can remain vigilant and avert any obstacles that may come in the way. Some of these goals may include buying a house, saving up for education or marriage or something as simple as going on an elaborate vacation.
Following trends blindly
Stock markets present many real-life examples where herd mentality overtakes logical reasoning. So while a stock may have gained popularity for its higher-than-expected returns, investors should ensure that they perform their own background checks.
It is always helpful to undertake one’s own due diligence before choosing an investment. Simply giving in to the fear of missing out can result in bad investments with irreparable damage to overall returns.
Not having a diversified portfolio
Perhaps the most resounding investment tip that investors receive is to diversify their investments into various asset classes, such that their overall exposure to risk is minimised. Diversification allows investors to offset losses from one sector through gains from another sector.
A stock offering higher returns in the current scenario can just as easily become a failing investment as market conditions change. Thus, it is never a good idea to put all your eggs in one basket.
Using high-interest funds for investing
Investing through borrowed money can be a risky endeavour because stock market investments may not always work out as planned. Moreover, due to the high volatility of stock market instruments, investors might find themselves in a tricky situation where a promising stock shatters their expectations.
Thus, only expert traders should consider investing with borrowed funds, given the expected movements of the market. Generally, investors with a large appetite for risk use margin funding to invest in the share market.
Making choices in a rush
Time holds critical value when it comes to investing in the equity market. When a stock starts falling, investors may get cold feet and end up making hasty decisions. Ultimately, minor downward movements in stocks can urge investors to take a short position in it.
Those investors who have been in the investing arena for a long understand that holding onto a stock can be a profitable recourse, even during stressful times. Thus, investors should give appropriate time to their investments to grow to lock in higher profits.
Timing the market
Timing the market is a common phenomenon wherein investors try to figure out when a market crash can be expected. Investors try to time the market to avoid locking their money when multiple losses are expected.
However, the chances of accurately predicting a market crash are minute. Moreover, historical evidence suggests that portfolio returns are largely dependent on asset allocation and not much influenced by the timing of the investment.
Letting emotions overshadow logic
Emotional investing broadly refers to the process of selecting stocks and investment vehicles based on a preferential bias or an unexplained liking towards a stock. However, emotions should take a backseat while making investment decisions.
Investment returns are influenced by market forces and overall investor sentiment that develops in the market. Given such context, it is important to only choose stocks based on one’s knowledge and available facts instead of preferring a stock based on short-term emotional decisions.
To conclude, newbie investors have a lot on their plate while entering the stock investing playfield. However, they should make informed decisions that are devoid of any market influence or personal biases. Being watchful of some common investment mistakes can aid investors in securing a profitable position for the long haul in the markets.