By Vishweshwar HS, www.showmytrade.com

Investing in the stock market is an exciting way for first-timers to create wealth and securing the financial future. Beginners usually excited to enter the market. They are little aware of potential market risk, which results in substantial losing their hard-earned capital. There are some common mistakes the first-timer does.  

Learn the fundamentals of investing; recognize the common mistake, and cultivating good investment habits for successful investments.

The major pitfalls in the investment journey, buying the stocks on rumors, investing emotionally, buy penny stocks to “get-rich-quick,” and investing in just one or a few similar sector stocks.

Some of the Biggest Mistakes

1. Invest first, think later!

A common mistake committed by the new investor is investing early and figure out next. The basics of investing are quite simple in theory. “Buy any stock at a lower price and sell at a higher price.” The question is, which low is really low, and what high is high? Remember, if one is buying as low price of a stock, the other is thinking the high cost of that stock. There need to be two parties to make a transaction (buyer and seller). The relative context of low and high based on market sentiments, demand, and supply of stock.

One needs to learn the fundamental factors like Earning-Per-Share (EPS), Price-Earning (P/E) Ratios, Dividend Yield and Book Value, etc. One also needs to understand the merit and demerits of analyzing such factors. Concepts like Value investing, Growth investing, Yield investing, etc.

Apart from learning the basics of investing, one should start “Paper Trading” (imaginary investment in the books and review the results from time to time of actual market movement). After getting the concept clear, one should start with a small investment and gradually growing the investment size.

2. Buying on Rumors, Hot Tips and Paid Media 

Many sources are looking to make a profit from the new investors by misleading. Promising the high gain, sure shot tips, insider information, paid media, vested interest in promoting some unsound companies. The new investors advised not to seek such services, which results in huge losses.

Instead, research the companies you understand and have personal experience of investing with such companies. Investing in learning the stock market yourself is the best thing you can do. Mastering the knowledge of investing, one can invest suitable to his risk appetite, returns expected with associated risk, time horizon, and temperament. 

3. Invest “What You Can Lose!”

Investing a big chunk of money will give overall good returns than investing incrementally. But this does not apply to new investors. The stock market knowledge, market shock, experience, and temperament can be different than dream and reality.

It is advisable to take a loss of what is affordable to you. Where you are investing short-term (Trader) or long-term (investor), you should not invest all the money at once. An emergency fund should be set aside for emergencies and excellent investing opportunities. Start with a small investment and gradually increase your investment as your experience and expectation will match in the long run. Steadily increasing the investment will give a chance to correct your mistakes and improve good investment habits.

4. Buying Penny Stocks and Herd Mentality

New investors think that buying cheap or Penny Stocks is a better idea. The logic is they can purchase the shares in the quantity of their capital and hope that these stocks will give than many times returns (multi-bagger).

For example, the stocks available for Rs 1, 2, 3 & 5, etc. can be bought with massive quantity in the hope that the shares will reach Rs 50 or Rs 100. 

Penny stocks are very cheap stock for a reason. Isn’t it? Investing in the penny stocks only on a luck factor is not a good habit of investing!

On the other hand, blue-chip (with strong fundamentals) stocks highly-priced and give decent returns. In reality, the majority of the penny stocks will lose 100% of your invested capital. Penny stocks are often vulnerable to manipulation and illiquidity.

Another mistake the new investors commit is following the herd mentality and invests all their money of such stocks which fad in the news. When the market direction turns the opposite direction, the new investor will lose substantial of their capital.

5. All Investing in One Stock or Same Sector Stocks 

Investing 100% of your capital in a specific company or same sector company is usually not a good move. Even the best companies/ sectors also have fundamental negative news. All the stocks in the same industry may also suffer. Thus significantly decline in the value of the stock investing.  

New Investors need to diversify their investment. Remember, while investing, risk also has to manage all with the expected return. Generally, new investors are comfortable in investing in one or a few stocks.

Stock diversification and investing in Exchange-traded funds (ETFs) are a better way to manage the risk.

6. Leveraging Position 

Another most significant mistake is to use leveraging. The stockbroker will provide the facility to use margin. Margin facility means that you can borrow money to buy more stocks than your original capital. Margin facilities magnify both profits and losses of your capital significantly. Remember, the stockbroker will not be a participant in your profit and loss.

For example, if you have Rs 10,000/- in your trading account, you can trade up to Rs 1,00,000/- (10X) of your capital. 

If your stock position goes up 2%, you potentially make 2% x 10 = 20% profit. Similarly, your stock goes down on the opposite side, say 2%, you lose 2% x 10 = 20% of your capital. Buying the future and options are also another form of leveraging your position.

The new investors use this facility to get quick-rich! If the market goes against you, loose substantial if not all the money.  

Controlling the emotion, learn the good investing habit, handling the risk, and start with small capital will help in the long run to be a successful investor.

Bottom Line

The new investor enters the stock market with excitement to grow and secure the wealth. They are susceptible to the common mistakes committed by a new inexperienced investor. Important to learn the basics of the stock market, controlling the emotion, judicial use of leverage, diversification, and, more importantly, take control of the investment decision. The good investing habits will go in a long way to be a successful investor eventually.

Kindly share your comments on the “What are the Biggest Mistakes First-Time Investors Do?” below. Any suggestion regarding this article will update in the next edition.

Thanks for reading.

Good Earning!