The stock market offers an investment opportunity that is appreciated by many investors today. However, learning to navigate through this exciting journey, for example, in the Indian stock market, is not as easy for a novice. In the Indian stock market, new investors often commit mistakes which derail their expenditure objectives and even destroy their capital. Nevertheless, these blunders can be sidestepped given appropriate education and self control. Thus, in this blog, we will discuss the 5 major mistakes that a beginner tends to do in Indian stock market and how can those mistakes be prevented.
1. Insufficient Research & Reach
By far the most regrettable error committed by some novices is the ability to invest in stocks and shares without the required research. The majority of new investors have a tendency of purchasing stocks on the recommendations of their friends, following the trends of social mediapr, or who’s recommending some stocks without having a clue about the company or the market growth potential of the stock. Ignorance such as this causes irrational buying patterns leading to losses.
How to Avoid It:
Research the company and its shares; Do not just buy because you saw a good stock deal. Make sure you know everything about the business, its finances, the management and where else the business serves in the market. Analyze the numbers, look for earnings, then look at the charts for metrics like increases in revenue, outstanding debt and profit ratios. Read the quarterly performance details and analyst coverage, use management’s discussion and analysis parts of the company’s returns, and run stock screeners and other external stock market resources to understand better about the prospect of the stock you are interested in.
Also, do not only concentrate on company-specific activities but also on the external environment including countries’ inflation rates and other macroeconomic indicators as well as world’s occurrences that will affect the particular market in focus. And in some cases, beginners can visit some sites like Moneycontrol, ET markets and NSE India where they can find the latest upcoming events of any stock or stock market as a whole.
2. The Pursuit of Immediate Reward
It is usual for many novices who join the stock market to wish to reap profits immediately. This often sows the seeds of one of their greatest downfalls, which is short-term trading, that is, the buying and selling of stocks in the most ruthless, desperate, and unhelpful manner due to mere price quotes or gossip. The lure of quick profitability is understandable but under such circumstances, it can be very dangerous and cause one to lose a great deal of funds.
How to Avoid It:
The most important thing to be able to pull off an investment in the stock market is to have a long view. Don’t be lured into hasty profits by looking at day trading or hot stock tips, but rather buy shares of good companies for a longer term. It is very usual for the markets to fluctuate, and volatility does not call for any buying or selling out of fear. That is where patience comes in. As a beginner, do not make any decisions based on feelings any as such and seek for gradual progress over the period.
If you are interested in making short-term profits, you may want to look into technical analysis but keep in mind this is an extremely high-risk and not very reliable option. Balanced investing usually means that the investor adopts a mix of short term and long term strategies according to his or her level of risk exposure.
3. Ignoring Risk Management and Diversification Strategies.
Yet another common mistake that a novice investor is likely to make is disregarding the risk of as well as management of the portfolio. For instance, a few investors may decide to invest all the funds in a given company or a sector. The danger of this approach is that if one stock or a sector performs badly then all the funds are at risk. This situation is more pronounced in the Indian stock market on account of its high domestic and global related volatility.
How to Avoid It:
When it comes to investing diversification is one of the greatest risk mitigation device. There is lower risk in a portfolio when one has investments in various stocks, sectors and asset classes. For example, there is the option of investing into funds which have large cap, midcap and small cap stocks or investing in mutual funds, exchange traded funds(ETFs) or even bonds.
Also, think about implementing stop-loss orders to protect your capital in the event of a steep decline in the stock’s price. A stop-loss order will sell shares at a set price thus avoiding the potential loss of an extreme drop in price. Another unwise strategy is to dive into investments before considering personal risk levels and take steps to safeguard the investment. If you are someone who is frightened by the risk go for the low yielding and steady investments such as blue chip shares or investment in debt funds.
4. Overtrading and Payment of High Brokerage Charges
Overtrading happens to be another trap that most beginners fall into. In their quest for making profits, novice traders tend to place too many trades within a given time which only brings about excessive trading costs. In India, every purchase and sale transaction has associated brokerage which, if a person is not careful, will reduce their profit margins. Some starters also pay expensive brokerage rates as they do not know the unique pricing rates of various stockbrokers.
How to Avoid It:
The first and foremost thing is to remember that the investments made in the stock markets have to be in the long term and that continuous trading is not the best of the strategy. Excessive trading results in costs that are not only avoidable but also additional exposure to the market.
To cut costs when trading, it is advisable to use a discount such as Zerodha, Upstox or Groww services which have lower brokerage rates than the full-service ones. Besides, do not engage in buying or selling too often unless it is very necessary, scope your reasoning with proper research and consideration to long term objectives. Always include the brokers commission and taxes incurred in trading when assessing whether to put a trade or not.
5. Emotional Investing and Panic Selling
Undoubtedly, even the best investors stand a chance of being overcome by emotions. Emotional investing, especially, is common for those who are new to the world of investing. Emotions like fear and greed may lead an investor to poorly timed decisions like panic-induced selling of stock during bad market conditions or worse, buying them at unscrupulous rates just because everyone is doing it. Such emotional factors can cause distortion and even lead to serious losses in all his or her investments.
How to Avoid It:
One of the best approaches to help prevent emotional investing is the creation of a detailed investment plan. Identify and document the financial goals you wish to achieve as well as the level of risk you are willing to assume before commencing any form of investment. This helps one to stick to the plan and curtail the effects of emotional decision making in the course of the investment activities.
When the market is changing, always bear in mind that it is natural for markets to have their ups and downs. Most importantly, do not exhibit panic selling of securities during the fall periods as this is most likely to bounce back with time. Rather than being able to invest for the longer period seen and assume the focused volatility of the investments, investors tend to become risk adverse upon seeing any volatility in the investment period. If you wish to avoid putting all your funds at risk in the event of a market crash, try and invest some of your money into anti-risk investment areas such as bonds or index funds.
Final thoughts
It is true that the Indian stock market has immense potential to create wealth, but the calculated risks involved are high, especially for beginners. Those avoiding these poor practices—no research, short-term focus, no risk management, overtrading, and irrational investing—stand a higher chance of doing well.
One thing to note is that stock market investment is not a call for quick and easy money, rather it is about patience, self-control, and constant education. You will be able to embrace this skill if you approach the market possessing the requisite knowledge, keep yourself abreast of the happenings, and take proper steps. Always think about the objectives you hope to achieve in the future, make sure you follow the procedure that you have identified, and refrain from engaging in any quick action. So you will not be a rookie in professional activity very soon – with experience, such activity will look easy and entertaining. Wishing you all the best in the investment strategy!