7 Silly Mistakes Every Small Equity Investor Often Commits

Both the Sensex and Nifty are trading close to their lifetime highs (the former is just 500 points away from its previous high while the later just 150 points short) and this is something which lures the investors’ community.

Before you also get carried away by this market rally; keep in mind that the biggest investing mistakes are committed only when markets are at their lifetime highs, and hence some precautions are required. Here are seven silly investing mistakes that every small and newbie equity investor often commits (one must avoid these)

Future & Options (F&O) Trading

Warren Buffett once quoted that the futures & options segment is a weapon of mass destruction. One false step and your hard earned money get wiped out. Sadly, the majority of brokers, technical analysts, and TV channels are encouraging and luring small investors and youth into trading just to generate their business and income.

Remember, derivatives (futures & options) are not for everyone. It is meant for hedging by HNIs (high net worth individuals) and institutional investors who trade a large amount of money. They generally do this to minimize the risk of price fluctuation.

Retail or small investors who use these instruments for instant money are only courting financial disaster because F&O trading is not suitable for everyone.

Wise Words: Wanting to be crorepati in the shortest span of time is the biggest reason for failure in the stock market. So, anybody who is serious about creating wealth from stocks should stay away from futures & options trading.

Buy Momentum (Penny) Stocks

The surge in the stock market has boosted many of the stocks in the past couple of months. Quality stocks with sound fundamentals have risen more than 40 to 50 percents from their recent lows. Along with that some penny (momentum) stocks have risen 100 percents and even more in that past 3 to 4 months though fundamentals of the company are not supportive.

Now when the price has risen too fast, these stocks (penny stocks) have become riskier. If you have invested in such stock, sooner or later the fundamentals will catch up with the price and your investment will suffer.

Wise Words: Protection of your capital should be a top priority if you’re a small investor. Don’t get swayed by the momentum when you go for stock picking. Study the fundamentals first and if you’re not comfortable with it, avoid the stock.

You must like this: 9 Key Financial Ratios To Find Winning Stocks

Taking Short-Term View – Common Equity Investing Mistakes

Despite the widespread optimism about equities, there is no guarantee that the market will give you spectacular returns in short-term every-time.

There will be ups and downs every time and being fully dependent on short-term trading will make you inactive in life and cripple your other businesses as well but yes market will surely give you handsome returns in the long run; that is what Indian stock market history suggests.

Wise Words: Remember that the stock market is not a gambling den where you can make big money overnight. In investing always remember the Rome was not built in a single day and in trading always remember Hiroshima and Nagasaki were destroyed in a day. Give time to your investment and create wealth.

Also Read: 5 Lessons To Learn From Long Term Investors

Using Margin Money for Investment

While F&O is a weapon of mass destruction, margin trading is even more dangerous. It is a leveraged position that includes putting at risk more cash than you can spare.

Investors typically use margin money to increase their purchasing power so that they can buy more stock without fully paying for it. But, do keep in mind that,  margin exposes you to the potential for higher losses.

On the other hand, brokers encourage investors to use margin money for trading in stocks because the brokerage you pay for every trade is their main income.

Wise Words: Borrowing is a great way to build assets that you can’t immediately afford. But using borrowed funds to buy a risky asset like stocks can be ruinous.

Think They Can Beat Mutual Funds Return

If average retail or small investor does a comprehensive study of his/her equity portfolio, he/she will discover that his/her gains from direct stock investment are nothing compared to what an average mutual fund made during the same period?

Mutual funds are managed by professional and skilled fund managers who have sufficient expertise, knowledge, and experience in picking the right stocks at the right time to get the best risk-adjusted returns. They are able to find multibagger stocks before that stock comes into limelight.

Wise Word: For retail investors, investing in a mutual fund is definitely a much better option than investing in stocks. If you can outperform mutual funds, you should immediately join a fund house as a fund manager otherwise stick to a mutual fund for wealth creation.

Making a Portfolio of A Few Stocks

Risking too much on any particular stock is a recipe for disaster.

Keeping your personal share investment small keeps your capital safe and you less stress that can make investing unpleasant. Once you have 30+ stocks you can grow the scale of each investment but until that day stays small.

Wise Words: Until you own at least 30 different shares never buy more than INR 10,000 worth of any share.

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Invest All Amount at One Go

Diversification is also necessary across time. In stock market investing, you will have to adopt a buying on dip strategy. If you want to buy 500 shares of any one company don’t invest all amount at one go. Instead split the purchase into 4 to 5 tranches.

Wise Words: Individual stocks are more volatile than mutual funds and there will be opportunities all the time to buy stocks at lower levels. Don’t think that this is the last chance to buy.

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