Executive Summary – The average returns in investment in stocks over a long-term investment period is supposed to be higher than investments in any other assets. But retail investors fail to get these high returns and many of them suffer losses as well. Many do not want to venture into equity after burning their fingers in it due to bad decisions. But there are some common mistakes that many retail investors make like not understanding the business, following the herd, trading rather than investing, lack of investment discipline and holding on to loss making stocks. If they avoid these and invest smartly, they can earn handsome returns.
Markets see biggest daily fall in 3 months. It is a good time to buy good stocks.
Top 6 Sensex companies add Rs. 50,000 crore to market cap.
These eye-catching headlines are common in financial newspapers and websites. The retail investor is left wondering how he missed the bus and never makes profits. There are some who make huge gains but most retail investors do not manage to beat the market and often end up having dud stocks. But the Sensex has performed very well. Here is the graph of its performance in the last 10 years. Except for two dips, it has been rising throughout.
Buying stocks without understanding the business – Making money is never going to be easy. Sometimes a tip or a stock recommendation might work for you. But it is important to understand the business that you are investing in and know what is the growth potential and recent news and analysis related to that company and sector. The investor has to study the company he is investing in. The investor should also be aware of macro economic indicators like growth rate, inflation etc. Investing blindly on the basis of tips is like gambling and one might not have much control over the returns.
Following the herd – The market is going up since the last three days and everyone says that it is a good phase for the market. The retail investor believes this and buys stocks at high prices. A good stock bought at a high price will not give the returns expected from it. At the same time, when the market is in a bearish phase and everyone is selling and the prices are falling, many retail investors panic and sell even value picks and blue chip stocks. It is imperative to understand the market and why the prices are rising or falling. It will be prudent to stay invested in high-quality stocks instead of doing what everybody else is doing.
Trading rather than Investing – We all have heard of our colleagues and neighbours who made a killing in the market in one trading session. But that won't make your wealth grow. Warren Buffet said that if you are not planning to own a stock for 10 years, then do not even think of owning it for 10 minutes. The longer one invests in an asset, the more returns it gives and its value will be higher. Of course, that does not mean that you buy a stock and wait forever to make gains. You should revisit the investments once in a while and see if the reasons for purchasing the stock are still intact. If that is not the case, you might be better off selling the stock and using that money to buy better quality stocks.
Holding on to stocks losing money – Most of us have made this mistake. We had bought some stock which seemed promising at that time or is a stock that has been doing well but we bought it at the wrong time. But now the stock is languishing in its lows. We are reluctant to sell it thinking it will bounce back. We attribute this to bad luck sometimes and wait for “good luck” when the stock will be rising high again and we can make profits. But sometimes, we do make mistakes and it is better to admit it and cut short the losses. The stock may not be doing well now either because of stock market forces or underlying value and if it does not look like it is going to bounce back in the near future, it is better to sell it off. Sometimes, we have some stocks that are neglected by us especially the ones which are not doing well or losing value. Neglecting them will lead to more losses. If the stocks are not showing any promise, it is better to sell them.