Pitfalls to Avoid While Investing in the stock market - Investing in Stock Markets | Investing in Stock Markets - B Com PDF Download

For ages now share markets have been most discussed and coveted Investment Avenue for Indians. But why is it that more people fail with market investments and advice against it? It is because they make these common mistakes while investing in share markets.

‘Share markets are not for everyone’ while this saying holds true, however it does not mean that it is not to be invested in at all. Speculating on share markets and their trends is a bad idea and every investor must refrain from it. When you are an ‘investor’ in shares it is most likely that it is not your full-time profession, and chances are you will be carried away with rise and fall in the stock markets. For this very reason the mutual fund route is often suggested for equity investments. 

11 Mistakes to avoid when Investing in Shares

1. Timing the market:

First thing to keep in mind is that there is no such thing as timing the markets. Markets these days do not follow a trend that a common investor can grasp or understand. Broadly yes, you can say that due a certain political or international event the markets may swing up or down, but apart from that one cannot be sure of how much and when the markets will rise and fall. There will be ‘predictions’, ‘projections’, ‘analysis’ and what not but still you as a common investor should not think of ‘timing’ the markets. Instead if you want to start investing, start small, go for a fundamentally strong company that has performed consistently well in the markets for a long term and invest in it and then take it from there.

2. Following Tips:

If you receive tips and blindly put your money in it, be prepared for some rude shocks down the road. Yes, you may gain at some point but following tips can be disastrous and there are more cases of people losing money than gaining by following tips. As mentioned before, study the trend of the company and its foundation along with its performance on the market even when there was a down trend. If the slide is lesser than most other companies or the performance consistent, then you can invest in their shares.

3. Borrowing for Investing:

Worst possible mistake to be made for any investment and the most catastrophic mistake to invest in shares, is borrowing money to invest. Any investment advisor, financial planner will tell you that borrowing for investment is the worst thing to do. The returns you get will be negated by the interest you have to pay on your borrowings and in case you incur even a slight loss that will result in you bearing a dual loss, which is: interest on the borrowings + repaying principal amount + bearing the loss on investment. I have seen people personally falling in this trap and going deeper. A colleague once followed a tip from his friend and since he did not have ‘substantial’ amount of cash, he took a personal loan (one of the most expensive loans), and invested in the ‘tip’ he received. The markets crashed, he lost quite a bit and then had to borrow from a relative to repay the personal loan and bear the loss, thus going in a spiraling debt trap. Invest with what you have and slowly increase your investments.

4. Thinking you know it all:

Chances are you may have made good profits and since equity is known to give high returns when the markets are good, you may stand to gain a decent amount of returns on investment. If you have been fortunate to gain on the markets by making some random investments, it is great for you. However, do not think that just on that basis you know it all. Share markets are complex and while nothing is impossible, understanding the markets will take considerable amount of time, knowledge, dedication and even then they will remain unpredictable. Biggest of market Gurus and Financial Analysts who appear in slick suits on your television daily giving their ‘expert opinions’ have fallen flat on their faces in the current market scenarios. So don’t get overconfident and think you know it all. Stick to the basics and invest systematically.

5. Holding onto dud shares:

If you have been investing in shares for a long time, you probably know that ultimately prices average out and you may be able to get decent returns on your investment in direct equity. However, this can result in holding onto to dud shares; a common mistake while investing in stock markets. A practical example is of a famous Indian company that came up with an IPO for its foray into the power sector and it opened at about Rs. 400 in 2008, and a lot of people bought the shares at that price as the company was ‘too big to fail’ and in the long run it was sure to give great returns. However, today after almost 5 years that share is languishing at Rs. 65- 70. In such cases the averaging will not work out. It is a good idea to book your loss and get rid of such duds that have not risen even after a long time or else it keeps eating away the profits of your investment portfolio.

6. Thinking short term:

Equity is the best asset class to invest in, which will give you inflation beating returns in the “LONG RUN”. Remember this statement. LONG RUN being the keyword. Short term gains may come once in a while but chances of you losing out is also higher. As mentioned before, if you are a common investor, whose primary profession is not shares trading or dealing in stock markets, look for the long term. Short term trading and speculation should be left for the ‘experts’ or full time share traders and brokers and investment big fishes. Long term investment will give you decent returns and hence the investment mistake of thinking short term should be avoided at all costs.

7. Not being Patient:

Just like thinking short term is a stock market investment mistake, being impatient is another investment blunder. If you invested today and tomorrow the market crashed, don’t think of liquidating it. Be patient. Things will work in the long run. If the company you invested in is fundamentally good and has a proven consistent record in the past, chances are the prices will improve and you will get good returns along the way. Be patient. Remember Investments are not 100 meters sprint races, they are marathons.

8. Panicking:

Don’t panic. Markets will fall, markets will rise, markets will stabilize, and they will correct themselves every now and then. This happens and will happen, so stay invested, if the shares you hold are fundamentally good and the proven over the past, you will get good returns. Don’t panic and break your investment habit.

9. Blindly following “Market Analysts and Money Guru’s”:

Remember the so-called experts and market Guru’s appearing on your screens are also humans and they do not run the markets, however influential people they may be. Their predictions and assumptions and analysis may go wrong. As mentioned before, markets are complex and are affected by a lot of domestic and foreign factors which at some point are beyond anyone’s control. So do your own research and don’t blindly follow what your favourite business TV channel told you.

10. Buying because a share is low & Selling because it is High:

If you feel a share is attractive to buy just because it is priced lower and will hence rise in price over the years, then this is a BIG mistake. The share can be low due to a lot of factors and may also be a case where the share has fallen steeply from a higher price and is the actual valuation and won’t gain much. Do not make this mistake while investing in shares to just go for a share just because it is priced lower. Similarly, do not think that just because the share is priced higher it will not gain much. Again it all depends on the performance, market trend and past record and fundamentals of the company. Just like you ‘shouldn’t judge a book by the cover’, you shouldn’t be judging a share based on its price.

11. Putting all your money in equity:

Last but not the least, do not put all the money you have for investment into shares. Diversify. Keep a balanced portfolio with a good mix of equity and debt as well as other types of investment avenues like Mutual Funds, PPF, FD, Recurring Deposits etc. If markets fall, you will loose all you have if you do not diversify. In worst scenarios when markets are bad your debt investments will at least give you some cushion. So DO NOT make this stock market investment mistake of putting all your funds into the stock markets hoping they will give fantastic returns. Don’t be greedy.

Stock market is not a bad place to invest as a lot of you may think. Nor is it a place only for a selected few. It is an investment avenue just like any other, however you should be more careful and prepared to face some sort of loss and stick to your investments in a regular systematic way and avoid these mistakes for investing in shares. Also if you feel that still direct equity investment is not for you, worry not as you can still get equity investment going by way of the relatively safer mutual fund route.