The recent economic developments have led to the lowering of interest rates on savings schemes such as Public Provident Fund (PPF) and National Savings Certificate (NSC), and bank deposits, thus making them unattractive. Hence, investors are in pursuit of those investment instruments that provide them with higher returns. They are now turning towards stocks as they have the potential to offer returns as high as 15% a year.
However, making profits by investing in stocks is not easy. Before you invest in the stock markets, you are required to have the market knowledge, if not, then it is as good as gambling or speculation. Investing in stock markets can take a person from rags to riches while being reckless may result in vice versa. The onus is one you to avoid mistakes and make use of the best practices when investing in stocks.
If you are a new equity investor, then you have to avoid the following pitfalls to be successful:
i) Investing With a Short-Term Horizon
This is one of the biggest mistakes that you would do as an investor. Stock markets are susceptible to various economic and geopolitical factors. Market fluctuations are the only constant of equity investments, embrace it. The markets may seem unfavourable today, but they don’t remain as such for an extended period, they will undoubtedly be booming in a few days time.
Therefore, it is essential to provide your investments with the much-needed time to mitigate market volatility and offer inflation-beating returns over time. If you are to invest in stocks, then you should have an investment horizon of at least five years. By doing this, you will let your investments go through market cycles and thereby providing you with high and stable returns in the long run.
ii) Investing Heavily in a Particular Stock
The old saying of ‘don’t put all your eggs in one basket’ holds good for stock markets as well. It is never a good idea to invest heavily in shares of a particular company. Holding several shares of a company is indeed going to benefit when that company is going to performs well. However, it is also true that your investments are going to suffer massive losses when that company fails to meet expectations. This is called the risk of concentration.
To avoid concentration risk, you need to invest in a variety of stocks across all sectors. If one stock fails to deliver good returns, then there is a possibility that other stocks make up for it. Therefore, given that markets are never going to remain the same, it is essential to diversify your equity portfolio by including several stocks rather than investing heavily in the shares of a particular company.
iii) Exiting When Markets Are Subdued
You shouldn’t sell your holdings just because the markets are down. On doing so, you will exit in the red, which is something that you wouldn’t want as an investor. Remember that markets will not remain subdued over a long period. They will undoubtedly go on the booming trend, and you need to wait until then to book profits and exit.
You make investments with a particular financial goal to achieve. Therefore, regardless of the market condition, you have to pursue your goal by staying invested until you have accomplished it. It is always a good idea to enter the markets when they are down rather than waiting for them to pick up. Therefore, when the markets are down, you may consider investing more as you can pick up stocks at a much lower price, and you will benefit when the markets start shooting up, thereby helping you achieve your goal faster.
iv) Picking Stocks That Are Not in Sync With Your Profile
It is essential to assess your requirements and risk appetite before choosing to invest in any stock. For instance, if you are not ready to bear a higher risk and are satisfied with average returns, then you may not consider investing in the shares of small and mid-cap companies as they possess higher risk. For your profile, you may consider investing in stocks of large-cap or blue-chip companies. These stocks are not affected much by the market fluctuations as the companies are well-established, and they ride the volatility wave better than small and mid-cap companies.
Likewise, if you are ready to bear a higher risk in exchange for the potential to earn returns in the range of 12-18%, then you may consider investing in small and mid-cap stocks. You need to note that the market movements heavily influence these stocks, and any changes will have a direct bearing on the stock price.
Investing in stocks is one of the best financial decisions that you can take. You will get a means to earn inflation-beating returns in the long run. However, like almost everything, even stocks need some time to provide excellent returns. Therefore, you need to invest with an investment horizon of at least five years. In short, the longer the investment horizon, the better the returns.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.