Looking from the outside, investment in the stock market seems to be an easy task. However, quite often, first-time investors realize that the truth is far from this myth.
Investing in the stock market takes significant effort, time, and patience. Stock market investing is like gambling, and if investors are not careful, they might make some huge investment mistakes that could cost them a lot of money.
First-time investors are habitually too eager to jump right into the investment game, and quite often, do not commit to learning from the mistakes of others.
Eventually, it all comes down to the harsh reality that most investors do not perform well in the stock market. It is because the average investor stays in the dilemma of getting higher returns without researching and analyzing the market.
Fortunately, by taking the time to learn about the common investment mistakes, most investors and traders are vulnerable to, investors can ensure to avoid making those expensive errors.
Let's take a detailed look into it.
Common Mistakes often made by First-time Investors
Here are a few mistakes that a first-time investor ends up making quite often:
1. Not selecting the right advisor
It is usual for a first-time investor to select the same advisor as his friend, family, relative, etc., or to select the one recommended by them. However, it is not necessary that the advisor that is right for someone else will be the right choice for that investor as well.
Before considering an investment advisor, it is important you consider your financial goals, type of clients the investment advisor works with, advisor's experience, advisor's qualification, advisor's past investment performance, and other such details, in order to avoid any unnecessary loss of money in the stock market.
2. Making trendy investment
Sometimes a company launches its IPO (Initial Public Offering) or if some stocks are doing well currently in the market that creates hypes in the market. First-time investors start getting peer recommendations or some renowned personality like their favourite celebrity, promotes those stocks through the media.
Eventually, that hype in the market leads the investor to invest in a "trending" investment without researching and analyzing the stocks, which can further cause the investor a huge capital loss.
3. Buying a really bad stock just because they are near 52 weeks low
A 52-weeks low is the lowest price at which the stock was traded in the financial year. This 52-weeks low is based on the daily closing price for the stocks and indexes.
Every investor wants to acquire the shares at a lower price and then sell them off at a higher price to book a profit. However, looking at the scenario from this point of view, a 52-week low might seem to be an attractive deal to investors for buying. However, simply looking at the stock's prices is not enough to purchase them. There are several other factors which an investor must look at. Just the price of the stocks is not a plausible basis for purchasing it; what is important is its future performance.
Thus, it is important to play safe and not go for buying a stock at its 52-week low as the possibility of it doing well is very low and the reasons for it to fail are strong enough.
4. Reacting to the market in real-time (Panic Selling)
It is normal to panic when the market goes down and affects the investor's investment. Most investors are risk-averse.
But if the investor has planned their investment, diversified their portfolio, and kept track of their investments, then the investor is still on the right track to fulfil his long-term goals.
Investors should stick to the basic rule of the stock market that they would buy when the market is remarkably down and sell when the market is up and stable. This way everyone will make money in the market. Moreover, never sell in correction and buy overvalued stocks to avoid loss.
5. Giving too much importance to ratios only
Financial ratios of the company can be useful in understanding a company's financial status and performance. However, sometimes, investors give too much importance to the ratio and invest in that company.
Most of the investors are not aware of the fact that ratios also have some limitations. Some components of the balance sheet may be declared at a historical cost. This disparity can result in unusual ratio results, inflation, business conditions, accounting policies, operational changes, etc.
6. Booking profits too early
Investors, contrary to traders, purchase stocks for long-term investment. In such scenarios, the profit booking arises under two conditions; first, if the investor requires liquidity to achieve certain financial goals for which the investment was made, and second, to rebalance their portfolio.
Sometimes it is easier to uphold as investors will need to sell the security to have that kind of money. However, it is important to note that the reason behind the profit booking is to fulfil specific goals and not diverge from them. For example, if the goal was to save for a home loan, then investors should not divert their money in paying for a car.
Sometimes, investors sell their stock way too early instead of waiting to finish the cycle. The fear of losing makes them book profits way too soon. It is a natural mistake for the first time investor to sell the stock over small gains. When in reality, there are chances that if the stock has performed well and given higher returns, it is likely to continue giving in the future.
7. Lack of Diversification
Having a portfolio with different stocks tends to stabilize the investment's ups and downs and reduce potential risks.
To earn higher returns, investors do not diversify their investments and stick with only a few stocks or the stocks of a certain industry. Which eventually leads them to incur a huge loss at a time when the market is down.
It is important to remember that "Diversification is the key to investment."
It is very hard to avoid all the challenges and mistakes that a first-time investor faces, even for experienced investors. But investors can learn to avoid these mistakes from others' past experiences in the stock market.
Before investing in the stock market, investors should focus on the long term financial goals rather than focusing on the short term gains. Analyzing and researching the market before investing can help investors to avoid these mistakes.