5 mistakes in stock market that investors should avoid.

5 mistakes in stock market that investors should avoid.

Stock market investors make many mistakes in the stock market. Like in chemistry experiments choosing a wrong catalyst can lead to a disaster in the lab, similarly making certain mistakes will have disastrous implications on your portfolio and capital. Very often we have seen people waver between greed & caution so fast that they fail to understand that there is a middle ground which requires patience & smart decision making. While there are numerous ways you can grow wealth in the stock market, there are limited ways to go wrong. Here are top 5 most common mistakes to avoid while investing in stocks :

  1. Using only 52 week high / low as an indicator.
  2. Considering stocks available for less as cheap ( valuation ).
  3. Not enough diversification.
  4. Investing basis stock tips on social media.
  5. Not having a strict stop loss / gain.

1. Using only 52 week high / low as an indicator

This mistake in stock market is often seen during a bull / bear run. 52w high / low is only a time vs cost indicator i.e. momentum. It’s not necessary that any of these points to the stocks’ true value.  You should avoid / use caution while using this indicator for investing in stocks as stocks at 52w high are susceptible to pullbacks & profit taking & stocks at 52w low might not necessarily have bottomed out. Usually a good practice is to track the stock for a few sessions after it has hit the 52w high / low and see if the trend continues.

2. Considering stocks available for less as cheap

Stock markets are tricky and some stocks can play tricks on you. Especially, what we call penny stocks. These stocks typically are available for less than INR 10 and internet is replete with pundits recommending these stocks as growth stocks. NOT TRUE ALWAYS. There is a reason why they are penny stocks ( bad business, bad management etc). It’s advisable to avoid penny stocks at all times and not to make a mistake in stock market of buying these stocks. Stocks available for cheap doesn’t necessarily are cheap in terms of valuation nor are they always good stocks that you should put your money in.

3. Not enough diversification

Diversification is usually used as a hedge against stock market volatility and to control the risk on your portfolio. People make this mistake in stock market over investing only in a few or a particular stock and not diversifying. While the upside to a strategy like this is very high, similarly the downside during massive drawdowns can result in capital erosion very quickly. It’s a good practice to diversify your portfolio with stocks across industries and take advantage of momentum ( up or down) to buy or sell. Having growth & value stocks in your portfolio should help diversify and get benefit of both strategies.

4. Investing basis stock tips on social media

This is the mistake most of us have committed. But Beware. Most of these unsolicited stock tips come from untested ‘traders’ in the market whose only goal is to gain followers. These stock tips are fodder to trap unsuspecting followers into buying stocks where the said stock tipsters have a position ( although they claim to have none). Even if you want to follow the stock tip, don’t just blindly invest. Always do your own research before investing.

5. Not having a strict stop loss / gain

Always have a stop loss that works for you. Stop loss depends completely on the risk appetite you have as an investor. While 5% stop loss is recommended, but sometimes people have higher risk appetite and would want to hold onto stocks even if they go lower than 5%. One reason is to use the opportunity to average down. On the other side it’s always good to have a goal. Typically inflation beating gain is considered very good. Many investors have a notional gain goal of 12% as it is above the gains that you might get if you had invested in other financial instruments like FD.

The bottomline is, as investors you should create certain rules for investment in the stock market that will protect your capital and give you reasonable returns.