5 mistakes to avoid in the stock market

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5 mistakes to avoid in the stock market

Equity as an asset class can be risky in the short term as a variety of domestic and international factors affect markets in the short run. Photo: HT

2 min read . 16 Jul 2015

The stock market surge in 2014 attracted a lot of new investors. According to the National Securities Depository Ltd and the Central Depository Services Ltd, 16.64 lakh demat accounts were opened in the last one year ending June 2015, PTI reported recently. This means, on an average, 1.39 lakh accounts were opened every month.

It is a good sign that new investors are coming to the market. But it is worthwhile to remember that the market is fraught with risks. Here are five things to avoid when investing in the stock market.

Avoid investing for the short term

Equity as an asset class can be risky in the short term as a variety of domestic and international factors affect markets in the short run. Therefore, it is important that you invest with a long-term view. For example, markets are down about 6% from the all-time high it touched in March, so it is likely that someone who entered the market at that stage is sitting on losses. Ideally, investors should avoid investing funds that they may require in the next 3-5 years to fulfil their financial goals.

Don’t bank too much on one stock

Even if you are confident about the prospects of a company, it is advisable that you don’t put all your money in one stock. It is always important to hold a diversified portfolio. For example, it is possible that the company you have invested faces some regulatory action or a management-related issue. Such company-specific risks are not easy to predict. And if such a risk emerges, it will not be easy for you to exit the stock in time.

Don’t follow the crowd

Identifying good stocks is not always an easy task and investors try to catch the winners in the market. In other words, investors end up buying stocks that everybody else is buying without much research. But when such a stock falls, it becomes difficult for individual investors to get out in time. It is important to understand the business and prospects of a company before buying. This will also enable you to take a call on the stock during different market conditions.

Avoid tips

A lot of free stock tips are available through different mediums such as television and the Internet. They should be avoided for a number of reasons. Such tips are usually for short-term trades which individual investors should avoid. Also, there could be vested interest in pushing for a stock and it is likely that the person giving such advice will not be available if things go wrong.

Don’t get emotional

Research around behavioural finance shows that investors’ decisions are not always based on logic and are often influenced by emotions. Investors get attached to stocks and are reluctant to sell even if it has lost and is not backed by strong fundamentals. Investors continue to hold such stocks in the hope that it will recover some day. The basic rule is that if the stock still fulfils the assumption on which you bought it, you should hold; if not, sell.

Stock investing requires knowledge, research, time and patience. In case you are not confident and still want to participate in the equity market, take the mutual fund route instead.