4 Big Mistakes to Avoid in the Current Equity Market

24 Sep 2020  Read 439 Views

In the field of finance, it is really hard to skip through the terms 'equity' or the 'stock market.' It has become almost impossible in the current world, not to hear of the fast-paced lifestyle within these markets. 

However, you would be surprised to know how easy it is to thrive and fall within this market in a matter of seconds if one is not careful. 

Every market has strategies to bloom in foreign markets, and here are some mistakes that, if avoided, might be of great use in this field of finance. First, let us understand what an equity market is?

What is the Equity market?

The equity/stock/share market is a platform where stocks of various companies and shares are traded amongst sellers and buyers, either publicly or privately. To understand the definition easily, let's take an example of a small business:

An individual owns a small business that is worth 20 lakhs, and he wishes to take their business to a further step by expanding. However, the problem this individual faces is that he needs another 5 lakh for expansion. So one solution can be to easily go to the bank and take some loans. But since this individual has already taken a loan with a high-interest rate, he wouldn't want to take up more interest so quickly since it is still a small business, and not every business blooms on expansionism like one expects. 

Now, to avoid falling in debts, loans, or borrowing scandals, where can the person go? The equity market is the answer to this problem. 

On this platform, the person can publicly list his company or entity on the platform announcing that he wishes to sell some portion of the particular company's share (shares worth 5 lakhs, the same amount he requires to expand) and if the potential buyers seem to think that his shares are worth investing in, they will buy the shares he would be offering. 

From these shares, those buyers will officially become part-owners of his company and gain dividends (equal distribution of any profit within the organization) off those shares.

What are the common mistakes that investors make?

It is inevitable for human beings to make mistakes or errors, but what is important are the lessons learned from those mistaken scenarios and applying them in the near future to be successful. But within the stock market, by making a wrong decision, one can lose their money easily. So, how can we avoid these mistakes? 

Well, let's go through some important points to keep in mind to avoid those kinds of mistakes that can lose you money.

1. Trader's Mindset

A lot of people don't know the difference between an investor and a trader. Both invest money in the stock market, but the precise difference lies in the mindset of these two. 
A trader is more likely to use the stock market for buying and selling shares in the stock market, but an investor is a visionary who concentrates more on long term profits than instant gratifications. 

For example, two friends Rahil and Rishabh, purchase stocks worth 10,000 rupees. After a few months, the value of these stocks fluctuates to increase to 12,000 (two thousand more than before), which Rahil sells to gain an instant profit of 2000 rupees, an instant gratification. 

However, Rishabh waits a little longer and holds on to these shares for a year. Of course, with other fluctuations in the value of shares, their worth increases to 20,000 (ten thousand more than the original sum, a doubled profit), and he sells these shares to earn a greater profit than his friend Rahil. 

This represents the vision of an investor since profits cannot be gained overnight. That is the main reason many invest in the share market, where the profit is almost guaranteed every time one invests their money in it. 

Of course, there will always be fluctuations that might not always be in your favor, but one just needs to be patient and mindful of where they are spending their money. For gains, first, one needs to let the company grow, and then its stock will grow over time.

2. Investing Money without Planning

Planning might not seem like a crucial part until one needs to run to catch a flight within an hour for their vacation. So, to avoid such a stressful situation, it is better to plan and pack in advance. 

In the very same way, planning is also required in the stock market. For answering questions like where to invest, how long to invest, an alternative for the loss in the market, or when to sell the share - one needs to research the market before stepping in the mold of planning. 

If one doesn't know where to invest, then the planning stage is of no use at all. It is the same as taking an unknown flight to somewhere. So, if a buyer or seller doesn't search the market to know which shares are worth investing in, profit will never come easily to them. Studying great investment examples that experienced stockers must have done in the past can help a lot than what one might think.

One usually sees advertisements or hot topics (or the most trending shares) of companies and about what's going on in the market, and invests in them without thorough research. 

In greed of higher returns, which are promised by those companies in those advertisements, many turn a blind eye to scams or false claims and, with high expectations, invest more than needed. If one does this, they are bound to be fooled and can often suffer from a loss. 

Not only is it foolish to not research or plan, but it is also when one enters the market with unusually great expectations. Keeping oneself in regulation (having realistic expectations) will help in making more logical decisions and help them thrive in the market easily.

3. Following Others Portfolio

Researching doesn't mean copying someone else's investment plans. Study it, learn from it but don't expect it to always work in exactly the same way. Since copying is easier homework, many invest money in the market according to the portfolios of their favorite celebrities. 

One checks these portfolios to see which stocks did their favorite icon/celebrity spend their money in to earn the empire they own today and envisioning oneself within that empire, and the greed often overpowers one's sense to invest blindly in those stocks. 

But what you don't remember is that the story of failure is never told to anyone because the market wants to set examples or reputation of success to attract people to invest in their stocks (almost works the same as product reviews - the better reviews are always displayed at the top but the bad ones are always either at the bottom or inserted in the middle somewhere, away from the customer's eye). 

Let's take an example for your better understanding of why you should not follow another portfolio to invest in the stock market. Suppose Warren Buffett purchased 100 stocks ten years ago, and each stock's price was 20 rupees. And after reading his portfolio, you purchase the 100 same stocks, but the current price of those stocks is 120 each (a profit of twenty rupees as of now), but what one forgets is that fluctuations are not always good. 

A fluctuation can decrease the value of these stocks to 100 (a loss of twenty rupees for one share - that means that since you have purchased a hundred of these stocks and the loss is of twenty in each, the loss is double the profit you wished for). 

And this occurred as you blindly followed another portfolio without thinking about the change in time, the value of money in today's time than it was, and other such factors. You just cannot copy someone's blueprint and expect they will lead you to the same route of profit as it did for that person.  

4. Not Diversifying

Remember the part about knowing where to invest and how much to invest by studying the examples of what the great investors within this field did but not copying it exactly? 

That advice will come to use as you understand the importance of diversification. Every company expands by diversifying its product range to enter or invade different markets. So how do you do the same in the stock market? 

This is where one needs to be clever as to how one can balance the losses of some fluctuations with the profits of others. Not every fluctuation is good. You must have noticed that whenever a stock crashes, it becomes the headline of the newspaper stating that millions have been lost. So whenever these losses occur, one needs to have an alternative that they are sure will always get the profit.

Of course, the easy play in this market is that one buyer can keep on buying or investing in the same type of stocks or shares (which does not always generate profit). So when you know or are not sure about investing in one stock, always have a backup that guarantees you profit. 

Not everything can be a gamble, and you have to be smart about it in the market. So what can we do to nullify investor's risk? 

Investor's risk can be nullified by neutralizing losses with profits through diversifying your investment niche (to invest in different types of stocks or shares to gain profit from every sector or industry). 

Conclusion

These are some niches that can help avoid failure in the market. Of course, there can be much more advice, but these do make the basis of most market strategies. Remember, if you are planning to enter the market, do have a long term perspective and be realistic when shortlisting a stock for investing. 

Do be patient, for it takes time for the prices to grow and for the company to grow alongside it too. Don't hope to wake up the next morning of the investment as a millionaire, for that is usually a scene for a movie. Be patient and be smart in the market, for the gullible gets trampled, and the ruthless realistic visioners always succeed.

About the Author: Divyanshu kumar | 11 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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