When it comes to investing, the primary thing that one should confess is that nobody is perfect. People who invest a lot often go through wins or losses. However, some of the mistakes people usually make when trading stocks are pretty common. The majority of the investors make such mistakes.
The important thing to figure out is that these silly mistakes can be avoided simply through awareness.
Several figures need to be taken care of while investing in the stock market. Before that, you should clearly understand what you are investing in, take your time, and select a path that suits your financial goals and risk appetite.
It may be noted that every investor’s risk appetite is different from the others and so are financial goals. Therefore, one should plan its investment strategy to maintain its risk appetite and time constraints.
In this blog, we will discuss some of the common mistakes to avoid while investing in the stock market:
- No Diversification
As the popularly saying goes: investors should not put all their eggs in one basket. This is the true statement that everyone should follow.
Diversification of a portfolio allows you to separate all the securities in different investment sectors i.e. asset classes such as commodity, shares, bonds, property and more.
Make sure that their portfolio should not include 10% in any of one fund. In this case, mutual funds offer a convenient way to diversify your portfolio as the fund manager of a mutual fund often invests in several stocks from different industries.
With the help of diversification, investors can spread out their investments in multiple mutual funds.
- Lack of Research
When it comes to investing, people often go for taking investment advice from their friends, colleagues, relatives. However, this is not the case.
Before you start investing, it’s always good to do proper stock market research as it will help you to get good ideas about investing. You may start searching on the internet as there is a lot of information available on the internet. However, you are required to figure out the right investment advice.
Also, you need to make a decent plan. For instance, if investor x wants to invest in the securities that would give him a decent return by the time he retires. But if Y investor wants to invest in such types of instruments which can give him a good return within the span of 7 to 10 years.
As both the investors are different, so are their financial goals. Therefore they need to make a different plan.
- No Portfolio Rebalancing
As time passes, the portfolio should be reviewed periodically. You do not need to forget that different asset classes will vary over time with some investments going faster in values as compared to others.
Also, the world doesn’t stick to one place. Economic activities change, personal circumstances change and so should the portfolio of an investor.
- Timing the Market
If you have enough knowledge about the stock market and try to attempt to time the almost futile market. You may be surprised that even experienced investors fail to time the market. Instead of timing the markets, investors should focus more on long term investment as with the passing time the volatility in the stocks also gets minimized.
Procrastination is a bad word for investors. Investors who want to achieve big share trading returns from the stock market should be active throughout their lives. In case, if an investor commits a mistake, the primary thing they need to do is to pay attention to their mistakes, closely monitor them on time and get out from the poor investment.
- Taking Investment Decisions in Isolation
It is one of the biggest myths that investment decisions can be made in isolation. You should know that the commentators or pundits do not analyse any of the funds on their own; instead, they do it on the merits.
Hence, investors must take expert’s advice before making any investment. If it is not followed, investors may build a risky portfolio which may affect their overall investments.
- Ignoring Tax Breaks
The primary principle for the investors whether experienced or novice is to always take benefit of annual tax wrappers offered by the government. Investing in equity offers several tax exemptions and deductions that you can avail of on stock market investment.
Here are the types of exemption and deduction that investors are entitled to in stock market trading investors, whether they invest directly or indirectly:
Long term capital gains are tax-free.
Investors can offset short term capital gains against short term losses.
Dividends are tax-free. If investors enter into the stock market on an indirect basis, by investing in mutual funds, then they are entitled to avail tax exemptions on long term capital gains.
The same rule is applicable for Equity Linked Saving Schemes.
- Excessively High Expectations
Many investors start their investment carriers thinking that they would make huge returns against the investment they make and surpass the market performance. Many of them believe that they invest Rs 100 into the stock market and make Rs 1000 investment overnight.
- Follow the Herd Mentality
Following a herd mentality is one of the biggest mistakes investors often commit whether they are experienced or novice. A bullish stock market brings confidence to many investors; they often get influenced by the people when they see the gains others are making.
This result is investors ended up investing when the market is at its peak. Therefore it is advised to ignore the short term gains and try to focus more on long term investments.
Just check out your past performance, try to analyse the pattern a particular stock follows, learn from the mistakes and make a move. Also, it is important to not take any important decisions based on it.
- Following a Trend
Many times, we see people who invest a lot, always following a particular trend. Yes, the trend in the stock market should be followed but don’t make it a concept as it is not always applicable.
Making a mistake in stock trading is very common. Intelligent investors who have a clear understanding of the stock market, also commit big mistakes sometimes.
However, the thing that makes them different from normal investors is that top-notch investors learn more from their mistakes without wasting time and make the next move carefully.
When it comes to investing, the right advice from the right people is very important. Experienced investors often take advice from prestigious stockbroking houses and include advice in their research. This, in turn, makes them more aware of making informed decisions.