Are you getting started in stock market investing? Make sure to avoid these five mistakes made by a vast majority of beginner traders, and start making handsome profits right from Day one.
Everyone loves to grow rich, and equity investments are an excellent choice to strike big. To change the famous quote, “With great power comes great responsibility,” for the stock market – with great wins there’s a larger potential for bigger losses.
Read on to find the five worst mistakes made by beginner traders and start making winning stock market investments.
Mistake #1: Following the Herd
Very often, when beginners get started with trading, they are likely to follow what others are doing, without considering their portfolios. Remember, what might have worked for your uncle, colleague or neighbour at some point in time, may not work for you. Just because someone tells you that they made handsome returns by investing in a particular stock doesn’t mean that you should invest in it.
Points to keep in mind: Instead, of getting influenced by peers, do your research – analyse the stock, look at its performance and make rational and logical decisions based on it.
Mistake #2: Expecting Quick Returns
This is another major mistake made by newbie investors – especially the younger generation. They believe that by investing in equity, they can make huge returns, earn quick bucks and turn rich overnight.
While there is the occasional story of someone striking rich overnight, the reality is quite different from that. Most often, people who focus on making short-term profits end up losing large sums, due to the volatility of the market.
Points to keep in mind: Equity is a long-term game, and you need to stay invested over a period to make good returns.
Mistake #3: Failing to Use the Right Tools
Can you change your car’s flat tire with just a screwdriver? You need a jack, lug wrench, jack stand, hub cap, and a lug nut and bolt key.
Just like that, it’s not possible to succeed in trading without the right tools. Irrespective of whether you are trading on the NSE or BSE, you need the right set of tools to make winning trades. Using good brokers to guide you, reliable trading software to monitor the market and basic financial understanding of the equity market is a must to see profits.
Points to keep in mind: Take a course in equity trading or hire a financial planner to get a better understanding of your personal finances.
Mistake #4: Not having a Trading Plan
Just like you wouldn’t go on a road trip without Google Maps or GPS navigators to guide you, you shouldn’t start trading without a well-defined plan. Start by defining the amount of money that you can afford to invest in the stock market and the maximum loss that you can bear. Define your entry and exit points, and stick to your trading plan at all times, till you get a better idea of the functioning of the market.
Points to keep in mind: Very often, beginner traders get caught in the ups and downs of the market, making them abandon their trading plans. Avoid this mistake.
Mistake #5: Going Beyond Risk Tolerance Levels
Beginner traders often lose sight of their risk tolerance levels. Risk tolerance is the investor’s capacity to accept risks. If you are a conservative investor with low-risk rates, then it’s better to invest in established blue-chip stocks rather than investing in volatile stocks of start-ups.
Points to keep in mind: All equity investments come with risks. If a particular stock offers handsome returns, then make sure to look at the risk profile to understand how much you are likely to lose, if things don’t go as expected. And, never invest more than you can afford to lose.
The Stock Market is an Excellent Investment
Don’t get scared by these mistakes. Instead, consider them as part of the learning process and work out ways to make your investments pay off. The stock market is notorious for offering high gains and high losses. The best way forward is to – decide on a long-term investment strategy, that you are comfortable with and stick to it.