In the medieval times, the early explorers had an extremely difficult time navigating the dangerous seas. The reason is that they were the first ones to do so. But once they identified sea routes and created maps, it became a lot easier for the people who followed. Every investor who starts out in the stock market is an explorer of sorts. He wants to find the best way to make money for himself and his family. But what if he was handed a map to make his life easier? He could avoid some of the common mistakes of his predecessors.
In this article, let’s find out some of the common mistakes you should avoid when you invest money in the stock market.
1) Assuming that investing is a gateway to quick money
Investing in the stock market is a great way to create wealth. However, it is not an easy quick-fix solution to short term money problems. Don’t speculate or try to time the market; especially if you are a novice investor. One wrong decision and you could end up losing a substantial sum of your hard earned money. You need to take your time and make a good investment decision before you put your money in a stock. Have a long term investment approach and invest carefully.
2) Following unsolicited tips
Your friend tells you that the latest summer movie is amazing. He recommends that you should watch it. Would you take his unsolicited tip and watch the movie? Sure. Why not; it is quite a harmless suggestion. But what if he told you that he knew an amazing stock that could triple your investment in one year! Should you heed his advice? Absolutely not! At least not until you have done your own research. A lot of investors pay heed to unsolicited investment tips and end up with poor returns. You should always check out if a stock is worth buying or not. Research is a very important step when it comes to investments in the stock market.
3) Depending too much on past performance
A stock has been giving amazing returns for the past four years. As a result, everyone you know wants to buy it. They expect a great performance this year too. What could go wrong?
Well, it is possible that the stock fails due to some other external factors that have nothing to do with past performance.
When it comes to stocks, past performance is a good way to analyse a stock’s history. However, it should not be your only indicator. You need to consider the future potential of the stock too. Fundamental analysis can be a great help to identify whether there is value in choosing a particular stock.
4) Not diversifying your portfolio
Alright, you have done your analysis and you found that the Information Technology (IT) sector has a lot of potential. You decide to invest all your money in stocks of this sector alone hoping that your returns rise quickly. But in case of a market crash that affects this sector severely, you could end up losing all your money.
Never put all your eggs in one basket. Diversification is the key to minimize your risks. Create an investment portfolio that includes stocks from different sectors. This way, you can limit your exposure to market volatility and avoid total loss in case there is extreme price movement in any single sector.
5) Ignoring risk vs. return
When it comes to stocks, the single most important formula you need to remember is: buy low, sell high. The second most important one is: higher the return, higher the risk. You may be interested in very high returns. But are you prepared to bear the high risk that comes with the investment? As an investor, it is extremely important to balance your personal equation of risk vs. return. Identify your risk appetite and invest accordingly. Ideally, you shouldn’t try to invest any more than you can afford to lose.
To sum up
The stock market offers immense potential for an investor. There are many interesting ways to increase your wealth. The more you learn, the greater your experience. But that said, it is still possible to make mistakes once in a while. But by being aware of the above common mistakes, you can avoid them in your investment journey.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.