Mistakes in the stock market made by an investor
Investors should consider the mistakes they are making in the stock market. Being aware of the mistakes and taking the necessary steps to avoid them can lead to successful investment.
The stock market is a thrilling journey. Ups and downs are a regular process in this industry. People often treat the stock market is a source where they can make endless money in a shortage of possible time. Though the assumption is completely neither wrong or right. People can earn money in the stock market if they invest their money strategically and efficiently. We must not forget a stock market is a place where if one person is making money there is someone who is losing.
Investors make plenty of mistakes while investing in the stock market, nine of them are the most common. Investors can significantly boost their chance of investment success by becoming cautious about these mistakes and taking the necessary steps to avoid them. 9 biggest mistakes in the stock market are as follows:
No investment plan:
People come to the stock market with a plan to make money but end up losing equity. They make their investment without any plan. They don’t want to do any strategic investment as it is a long and hectic process. People often look for trending stocks and invest their money and take the loss. On the other hand, if they make an investment plan and execute properly, it means written guidelines will help investors adhere to sound long-term policy, even in the downside market. An investment plan is very crucial for any kind of investment. Before making an investment plan investment goals, objective, risk associated with the investment should be determined. Then define the approach of the investment, what will be the benchmarks, how the asset will be allocated and how the portfolio will be diversified.
Buying on baseless tips:
Whenever people get a tip from their fellow investors or any other party they start relying on the rumor and dive into it. They hardly filter the rumor before making any investment which leads to a huge loss. Before relying on any rumor we need to find out that the news is backed with strong fundamental aspects. Make sure you do your research so that you make your investment decision more accurate. So next time you are advised or suggest buying a rumor ensure you have got all the facts & figures and convinced with the result of your research.
Overlooking the big pictures:
Most of the time we buy shares which have a good track record of earnings in the past and in a long upward move. But very often we overlooked the future. The qualitative analysis is often avoided in the case of historically well-performed shares. If an economy is changing and there is a better alternative available for a particular product of a company sooner or later the company will lose which will ultimately push its price to the downside and its holder will also lose. It is very important to analyze a company considering the qualitative aspects. It is a strategy that is one of the most useful tools for finding out a potential investment.
Compounding the loss by averaging:
A common practice in our stock market is averaging in the downside market. Investors assume the stock will bounce back in a short period and start buying to adjust their rate per share. They never determine the reason behind the move and the time horizon of the move and ultimately lose a healthy amount of their investment. A worse belief is seen in the down market, buy more shares of the stock since it is much less priced. Averaging will be beneficial to the investors who have a high-risk tolerance capacity and have enough funds to buy 2x or 3x quantity of shares to adjust their loss at an affordable rate. Besides capacity and available fund, one more important thing must be considered before averaging, is the rationality of the movement and its reversal pattern otherwise it is better to take stop-loss and switch to the better stock.
Failure to implement stop-loss tools:
Stop-loss is an important tool for risk management. Investors are very reluctant to use these tools. Instead of using stop loss investors start averaging. It is very common that someone is using stop-loss but not sticking to it, very often they hold a share below their stop-loss. Using a stop order or trailing stop order is very helpful for trading stocks. Every investment is associated with risks some are in our control some are not, so to reduce every possible loss stop-loss tools are very necessary.
Not considering own risk capacity:
Most of our investors don’t know their own risk tolerance level. That’s the main reason they become frustrated with the ups and downs of the stock market. As investors are not aware of their capacity for risk absorption they take more risk and finally lose their investment. Before going to make any decision it is necessary to determine how much loss would be fine for you because every investment will not into your favor. To determine your probable loss first then closely monitor the movement of the stock, if the price goes down to your determined price of loss taking then sell and take your position in a better stock.
Not diversifying the investment: Putting all eggs in one basket is probably the worst decision an investor can make. There is a possibility to earn an attractive return from the non-diversified investment but the risk associated is higher than the expected earnings. A well-diversified portfolio can protect an investor from losses. It also protects from the extreme price movement of shares and to adjust losses from one stock with the profit from another.
Confusion between historical return with future expectations:
Historical data are a great source to predict future expectations of any stock. Not every time the past can predict the future movement. Sometimes the stock can move in a bizarre way, so always be cautious and don’t be confused with the past data.
Following the herd:
Going with the flow is not a good idea. Following the heard may either end up paying too much for investment or may influence an investor to take a position in securities that have already at its peak and may be ready to turn around. Sometimes a stock can keep its downward session long after the smart money moved out. Don’t get into any stock which is overcrowded. Always justify the crowed before making any investment with fundamental aspects.
An investor can generate profit in a safe way by avoiding the mentioned mistakes. Many investors are making those mistakes on a regular basis. So an investor should be aware of those typical errors and should take steps to avoid those.