Top 10 Mistakes New Investors Make in the Stock Market by Kamanksha Swami

Top 10 Mistakes New Investors Make in the Stock Market

Kamanksha Swami

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Often when we hear the word, ‘investment’, the first thing that comes to mind is “managing money wisely.” TBH – the world of investment is not limited to managing finance and goes beyond ‘just making and managing money’.

Whether we know it or not, we’re making investments all the time in our lives— from building habits, learning new skills, making friends, choosing jobs, partners, or to even deciding what to eat. Every choice is a type of investment.

The thing is, investment is risky. It’s never easy to figure out what will work for you in the long run. Even the world’s top investors have made mistakes and seen some of their investments lose value over time.

But, as Mellody Hobson wisely quotes, “The biggest risk of all is not taking one.”

That said, the best way to avoid risk is doing the homework and following the handbook to avoid basic shocks. Hence, we have put together top 10 mistakes new investors make before beginning your investment journey. So let’s begin with.

Top 10 Mistakes New Investors Make

During the time of the first major market crash, famously known as Black Friday, a lot of investors felt lost—some even got really depressed, and sadly, a few took drastic steps.

While that sounds pretty heavy, it shows that the markets can be as wild as a roller coaster ride. It doesn’t guarantee profit; what really matters in the long run is smart investing, patience, and understanding how to handle your emotions, which you can only build over time.

If you’re new to this game, it’s crucial to learn from others’ mistakes instead of making them yourself. To help you stay on the right track and avoid common blunders, we’ve put together 10 mistakes that new investors often make. Think of these tips as your safety net to keep you from falling too deep into the wrong moves.

Also Read: How to Start Investing with Little Money: Smart Strategies for Beginners

1. Not Setting A Financial Goals

As the famous quote by Zig Ziglar goes, “If you aim at nothing, you will hit it every time.”

Imagine you’re going on a road trip without a map or a destination in mind. This sounds thrilling but you might end up wandering around or, worse, getting lost! The same goes for investing. If you don’t set clear financial goals, you could end up making random investments that don’t satisfy what you really want.

Because, “A goal without a plan is just a wish.” Your financial goals can be anything – whether building a retirement plan, saving funds for your college fees, or setting aside capital for your house downpayment.

Set both long-term and short-term goals for a clearer view. Long-term goals, like saving for retirement, allow you to invest in higher-risk options that can grow over time. Short-term goals, such as planning for a vacation next year, require a safer approach to protect your funds.

2. Avoiding to Build Rainy Day Funds

Not building a rainy day fund is like walking a tightrope without a safety net — it’s risky!

A rainy day fund is your financial cushion for unexpected expenses, like medical bills, car repairs, or job loss. Life is full of surprises, and having some cash set aside can save you from panic and bad decisions when the unexpected happens.

Aim to save at least three to six months’ worth of living expenses. This fund should be easily accessible and keep it separate from your investment account. Think of it as your “just-in-case” money, so you’re not tempted to dip into your long-term investments when life throws stones.

As the saying goes, “It’s better to be safe than sorry.” Building a rainy day fund helps you stay calm during storms and allows you to invest more confidently without the fear of financial instability.

3. Not Understanding Your Investment

The investment world is like a vast ocean with a wide range of options, each with its own risks and rewards.

Many new investors jump into stocks, mutual funds, or cryptocurrencies without really knowing how they work. It’s important to understand the type of investment you’re making—whether it’s stocks, bonds, ETFs, or real estate. Each comes with its own set of risks and potential returns.

The best way to go around it is diversifying your portfolio. Always take the time to read up on the basics of your investments. Ask questions, seek advice, and educate yourself. Remember, investing isn’t just about making money; it’s about making informed decisions that match with your financial goals.

4. Lack of Research and Homework

Before investing in any stock, mutual fund, or cryptocurrency, take the time to research the company, its performance, and the industry it operates in. Understand what you’re investing in, the risks involved, and the market trends.

Remember, just because your friend or a popular social media influencer says a stock is a good buy doesn’t mean it is!

Warren Buffett, one of the most successful investors, once said, “The best investment you can make is in yourself.” So, spend time educating yourself about different investment options, financial markets, and strategies. This knowledge will empower you to make informed decisions and avoid unnecessary losses. Take the time to do your homework.

5. Overlooking Importance of Diversification

As the saying goes, “Don’t put all your eggs in one basket.” This old adage rings true in investing.

Diversification means spreading your investments across different types of assets to reduce risk. If you put all your money into one stock or sector, you’re putting all your eggs in one basket. If that stock takes a hit, so does your entire portfolio.

By diversifying, you can cushion the blow from market downturns. So, take a look at your portfolio and ask yourself: Am I playing it too safe or taking on too much risk? Aim for a balanced mix that sets smoothly with your goals and risk tolerance.

FREE TIP: Variety is not just the spice of life; it’s also the secret sauce for a healthy investment strategy.

6. Chasing Tips, Fads, and Fashions

In the world of FOMO, it’s tempting to jump on the latest hot stock or trend just because everyone else is doing it. You know, like the time everyone went crazy over a certain fruit-based diet or a dance challenge on social media? Just because it’s trending doesn’t mean it’s right for you!

Following tips from friends, family, or influencers can lead you down a risky path. These tips can be unreliable and often lack proper research. Remember, “Just because it’s popular doesn’t mean it’s profitable.” Rather than following the latest fads, focus on investing based on solid research and a well-thought-out strategy.

Take a moment to think: Does this investment align with my financial goals? Is it something I understand? The key is to invest in what you believe in and what fits your long-term plans. Stick to your own strategy, and don’t let the buzz distract you from your goals. Investing is a marathon, not a sprint! So, instead of getting swept away by the latest trends, keep your eyes on the prize and stay the course.

7. Overlooking Fees and Brokerages

When you invest, whether it’s through an online platform, a wealth manager, or a robo-advisor, there will be fees you need to pay. Just like buying a ticket for a concert, investing comes with its own costs.

These fees can change based on how you choose to invest and what types of assets you pick. For example, some platforms may charge a flat fee for each trade, while others might take a small percentage of your total investments every year.

So, before you jump into any investment, take a moment to look at the fees involved. Knowing what you’ll have to pay will help you figure out how much you can really earn. Remember, “A penny saved is a penny earned.” Keeping an eye on those fees can help you make more money and keep your investment plan on track.

8. Lack of Patience and Driving Through Emotion

Investing isn’t a sprint; it’s more like a marathon. But sometimes, new investors get caught up in their feelings, leading them to make snap decisions.

Many people sell their investments during a market downturn, thinking, “I need to cut my losses!” But studies show that historically, markets tend to recover over time. For example, after the 2020 pandemic crisis, the Nifty Index rebounded in a year and went on to reach record highs. Investors who stayed patient and held onto their investments often ended up better off.

As Warren Buffett famously said, “The stock market is designed to transfer money from the Active to the Patient.” This means that those who stay calm and hold onto their investments usually win in the long run.

Remember, good things come to those who wait.

9. Checking Your Investments Too Little (or Too Much!)

Reviewing your investments is like looking at the weather before going outside. You should ideally check your investments at least once or twice a year to ensure you’re on track to meet your financial goals.

However, don’t check your portfolio every day. Doing so can make you overly sensitive to short-term ups and downs. For instance, stocks can change value daily, and if you panic over a small drop, you might sell when you shouldn’t.

A study by the American Psychological Association shows that constantly monitoring your investments can lead to stress and bad decisions. So, find a balance: check in regularly, but don’t obsess over every little change. This will help you keep your focus on your goals!

10. Trying to Time the Market

Many new investors think they can predict the best times to buy and sell stocks. But timing the market is tricky and often leads to mistakes. Studies show that even experienced investors struggle with this.

Instead of trying to guess when prices will go up or down, focus on a long-term investment strategy. This means buying good stocks and holding onto them, even if the market fluctuates in the short term. Because, “It’s not about timing the market; it’s about time in the market.”

If holding onto a very long period is something you are unable to dig in and want to make some cash out of each investment, try using the 5-Point Investment Strategy where you can buy either every price dip of 5 and sell with every recovery of 5. This is a more practical approach to enjoy short-term benefits while picking long-term rides.

The Mythological History of The First Investment: A Fistful of Grains

The Mythological History of The First Investment

As we begin with, when we say investment, it’s not just about money. It’s about where you invest your time, effort, and resources. The idea of smart investment goes back thousands of years, often heard in cultural stories told by our grand-parents or parents.

Over 5000 years ago, during the ancient Vedic period, the world was in chaos and at the verge of its end. In the middle of this, Lord Vishnu gave a farmer a handful of grains, a gesture of last hope to save humanity and revive what’s lost.

You might think, “Just grains?” But these grains were special, carrying a sign of hope and new beginnings, as mentioned in ancient texts like the Rigveda – the oldest book and first veda in Indian history.

Rather than eating the grains, the wise farmer decided to save them. He knew that with a little patience, these seeds could grow into something much bigger. Once things calmed down, he planted the grains, and they grew into a large crop that could feed his family and others. They say all that exists now is the reward of the wise investment of that farmer – myth or true – it shows how five grains can feed the world if invested smartly.

This story isn’t just about farming; it’s about the first real investment, traced back to one of the oldest cultures and mythological books in the world. Just like in investing, whether it’s money, time, or effort, even a small start can lead to big rewards if you’re willing to wait. The lesson from this ancient tale is clear: with patience and care, even tiny investments can become something great.

In Brief

Investing is more than just a financial journey; it’s about making smart choices with your time, effort, and assets. Using this tips, you can avoid mistakes new investors make and save yourself from major drops.

Whether you’re starting with a handful of grains or your hard-earned money, understanding the basics of investing, learning from past mistakes, and maintaining patience can only lead to big rewards.

Remember the wise words of Warren Buffett: “Do not save what is left after spending, but spend what is left after saving.” So, take the time to set your goals, do your homework and keep a long-term investment mindset.

FAQs

Is it a mistake to compare my progress with others?

Yes! Everyone’s financial goals and situations are different. So comparing yourself with others can lead to unnecessary pressure and poor decisions.

How do taxes work on stock investments?

In India, profits from selling stocks held for more than one year are taxed at 10%. While those held for less than one year are taxed at 15%.

Do I need a lot of money to start investing?

No, you can start investing with a small amount, even as little as ₹500 in mutual funds.

What is a trading account?

A trading account is an account that allows you to buy and sell stocks online through a broker. You will need to make a Demat account to make transactions.

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Posted Dec 11, 2024

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