There are many stories making the rounds about people making a windfall by investing in the stock market. Similarly, there are many stories about people losing their hard-earned money to trading.
What would you believe in?
Both these stories are true. And, there is one important lesson— ‘you cannot time the market.’
So, what can go wrong in stock market investing? Or, what are the common mistakes in stock market investing, and how to avoid them?
Here are eleven common mistakes that traders and investors fall prey to in the stock market:
1. Investing Or Trading On Unsolicited Advice And Tips
Investing in the tips and advice of peers, family, relatives, and friends can lead to biased investing and mismanaged market timing. Unsolicited investment advice, often delivered through cold calls, chats with peers and relatives, emails, or social media, can be a red flag. These investments might have an ulterior motive of front running and pump-and-dump.
Investing on the advice of peers, relatives, and friends can be harmful to your portfolio by causing you to take a higher risk than your risk appetite.
Solution: You can conduct thorough research and base your investment decisions on fundamental analysis and financial data. You can also check for daily stock picks on your demat account app for stock market updates.
2. Ignoring The Impact Of Government Policies
Government policies like the latest update on the removal of indexation and modifications in capital gains taxes are essential from the point of view of investing. They can impact your returns and financial goals.
Solution: You can stay updated on government policies, regulations, and economic indicators that can significantly influence the stock market. Alternatively, you can check updates, blogs and news bites on your stock market demat account app.
3. Ignoring Corporate Governance Issues
Corporate governance is the framework that governs how a company is managed. Therefore, it is essential for traders and investors to not overlook any weakness in the corporate governance of a company.
Solution: You can look for companies with strong corporate governance practices and a transparent track record.
4. Investing In IPOs Without Knowing About The Business
The idea behind investing in an IPO solely for the listing gain isn't new. But you must note that these companies have yet to be traded in the stock exchanges, and therefore, much has yet to be seen regarding their performance and susceptibility to uncertainties and volatility. Therefore, it is better to read research reports and other reviews on the IPO before investing.
Solution: You can stay updated with the latest IPOs, their ratings, and reports through your broker platform or from trusted sources.
5. Ignoring The Impact Of Global Markets
Global markets and geo-political factors have a contagion effect on the Indian stock market. Global scenarios like Fed rate cuts/hikes, government policies in different countries, disasters and distress around the world can impact the Indian stock market volatility.
Solution: You should be aware of how global economic events and market trends can affect the Indian stock market.
6. Intraday Trading Without Knowledge
Trading in F&O can be risky, and trading without the knowledge of strategies, stocks, and markets can be fatal for your portfolio. In our introductory example, the horrors of trading without knowledge can be as bad as losing all your hard-earned money or falling into a debt trap.
Solution: You can focus on long-term investments and avoid excessive trading. You can read various investor education materials like “What is scalping?” available on stock market apps to gain knowledge.
7. Not Considering The Impact Of Inflation
With time, the real value of your goals rises due to inflation. So, a total of 10% return on your investment in two years with 6% annual inflation would be -2% eventually. This is how inflation erodes your returns and pushes you away from your financial goals.
Solution: You can invest in assets that can help hedge against inflation. Stock markets have the potential to beat inflation, but they also experience short term volatility. Furthermore, you can calculate the real value of your goals and invest accordingly.
8. Ignoring The Impact Of Currency Fluctuations
While trading in currencies or derivative strategies like Swaps, you need to be aware of currency fluctuations and the reason for the same.
Solution: While investing in foreign securities, investors should be aware of the impact of currency fluctuations on their returns. It is better to stay away from investments you are not aware of.
9. Failing To Diversify Across Asset Classes
Every individual has a unique risk profile, and their risk appetite, too, differs across financial goals. Therefore, it is crucial to diversify your investment portfolio across asset baskets. This would ensure that your investments are aligned with your financial goals and help you fulfil them on time.
Solution: It would help to spread your investments across different asset classes, such as equities, bonds, and real estate, to manage the overall risk.
10. Not Considering The Impact Of Taxes
Taxes are an inseparable part of trading and investing. Their extent differs in the case of short term and long term investing.
The Union Budget 2024 recently changed the percentage of Short Term Capital Gains (STCG) tax and Long Term Capital Gains (LTCG) tax on various financial assets. Other than these, there are more taxes like STT (Securities Transaction Tax) and more, applicable to your stock market trading and investing.
It is essential to be aware of these tax implications while investing in the stock market.
Solution: Investors can be aware of the tax implications and consider tax-efficient investment strategies like tax harvesting and more.
11. Trying To Time The Market
Trying to time the market can lead to missing out on significant gains during bull markets. Similarly, you never know what is going to be the lowest stock price while buying on the lows.
Solution: Mechanisms like Equity SIP can help you average out your buy price. Furthermore, goal-based planning can help you understand your exit strategy.
You can steer clear of all these stock market investment mistakes by choosing a platform that provides both knowledge and speed on demat account opening online.
In Summary
The Indian stock market, while offering a higher return potential, also comes with its own set of risks. Investors and traders can benefit by avoiding common mistakes and can amplify their returns and manage their risk.
Disclaimer: This story is not part of Outlook Money's editorial content and was not created by Outlook Money journalists.
