Early investors are especially prone to making mistakes that can cost them dearly in the long run. In this article, we’ll look at the 10 most common mistakes made by early investors and how you can avoid them. Here are some common errors that rookie investors should watch out for.
1. Following The Herd May Not Give You The Same Results
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Following the herd mentality when looking to generate a loyal source of passive income in India can be a huge mistake for early investors. It’s easy to get caught up in tall promises made by success stories your friends and kin tell you. Taking this approach could lead you astray.
For example, let’s say a big-name investor is investing heavily in IT stocks. Sure, they could be right, and you might see short-term gains; however, it’s possible that the same IT stocks could give you better long-term results if only you had done your research instead of blindly following them out of fear.
Plenty of factors play a role in deciding the high probability of high returns from an investment stock. Oversimplifying the high probability of a mutual fund and/or stock can be detrimental.
Relying on someone else for investment advice may provide instant gratification, but staying focused on analyzing current market data rather than following the pack will be beneficial for any early investor in the long term.
2. Insufficient Research Can Lead To Reduced Profits
Investing in a company without doing your research first is like gambling without having the odds. You could win big, or you could lose big—and it’s all part of the risk.
Without knowing more than the stock market share price, it’s impossible to tell how much risk an investor is taking on. Research should always include learning about a company’s history of returns, dividends, and other factors that can affect performance over time.
Additionally, investors must pay attention to the news surrounding a company to monitor changing conditions and potential pitfalls ahead. It pays to take the time upfront to do some research before investing, as it can lead to significant financial gains for those who practice due diligence.
3. Focusing on short-term gains
Early investors looking for a quick profit often focus on short-term gains. It is important to keep market risk management at the centre of the investment process and not become fixated on attempting to make a quick buck. Short-term market gains are possible either after years and years of investment wisdom or by mere luck. Betting on luck does not have much of a track record for success.
Instead, it is best for early investors to take their time and create a well-thought-out strategy with market risk management in mind. This strategy should include calculated investments that align with short and long-term goals so that any market fluctuations do not throw off the timeline for reaching them.
Taking a little extra time when formulating a strategy may seem cumbersome at first, but in the end, will lead to greater success.
4. Getting emotions involved
Fear of loss can lead investors to hold onto a stock for too long or sell too soon out of fear when the stock starts declining even slightly. When this occurs, investors can often become exposed to unnecessary risks that they may not have come across had they kept a level head.
On the flip side, greed can also lead to hasty decisions that can result in steep losses if things don’t go according to plan. It’s incredibly important while investing early to cultivate an attitude of balance.
The biggest mistake an investor can make is letting their emotions control their decisions; it’s always best to go into any market venture with a level head and do due diligence ahead of time.
5. Not factoring in hidden charges such as tax and transactional fees
Investing can be a great way to grow your finances, but there are many hidden costs that should be considered before jumping in head first.
- An annual account maintenance charge to cover service and operational costs accrued over the course of a year. For example, Zerodha’s Demat account comes with an annual fee of 300 INR after it’s free for the first year. Similarly, Angel Broking’s annual charge stands at 450 rupees.
- Transaction fees are levied every time one sells or buys securities. SEBI applies a turnover fee of 0.0002% on the entire transaction value.
- Securities transaction tax (STT) is a mandatory fee, that is 0.1% of the transaction value
- Capital gain tax is added to the profits made from the sale of secure ties, depending on the holding period.
Short-Term Capital Gain tax @ 15% + 4% cess, If the holding period is less than 1 year
Long-Term Captial Gain tax @ 10%(when profit is greater than 1 lakh).
Neglecting tax implications when investing can cause disastrous financial consequences for an early investor.
Although tax may not be glamorous to think about, taking advantage of tax benefit investment options such as Provident Funds and NPSs offers tax deductions on contributions as well as tax benefits upon making a withdrawal.
These are great earning tricks to minimize tax payments in the long run.
6. Buying far-out money options
Investing in options can be highly risky for an early investor, especially when entering the market with far-out-of-the-money options. This is due to their leverage because it amplifies the potential gains, but also magnifies any losses that occur.
Options trading leaves investors vulnerable to sudden price shifts, even if they were correctly predicting market conditions. With the risk of large losses comes a chance of gaining larger amounts.
However, without experience and a lot of research, an early investor may not be able to make informed decisions on when certain options will work best as part of a larger strategy.
7. Rigid strategies
As an early investor being rigid about strategies can lead to missed opportunities or becoming too emotionally attached to certain stocks or investments, leading to poor decisions.
When one stock or mutual fund yields a positive return, people often hang on to that investment even when better options are available elsewhere.
This is known as inertia, and it can be dangerous for an investor since the same stock/mutual fund may not yield similar returns in the future.
By sticking with one particular stock or mutual fund, investors deny
- Themselves the opportunity to diversify their portfolios,
- Balance out risk,
- And take advantage of higher potential returns elsewhere.
Instead of being set in your ways and relying on a single stock/mutual fund, take a dynamic approach, keep up with market trends, and remain flexible when it comes to devising strategies – after all, as you gain experience in the market, you’ll quickly become aware that no two investments are ever truly alike.
Above all else, being willing to adapt and accept losses when necessary is key to profitability.
8. Avoiding PCR rating
Put Call Ratio(PCR) is a ratio that compares the number of put options traded to the number of call options traded over a given period of time. A high Put Call Ratio indicates that more investors are buying puts than calls, suggesting potential bearishness in the market. On the other hand, a low PCR indicates bullishness in the markets.
Analyzing this ratio helps investors will gauge positive and negative divergences to determine if there are any undervalued or overvalued securities. This gives investors greater success in predicting market trends and making profitable decisions.
Many early investors get themselves into trouble when it comes to leverage. After all, these can be incredibly powerful tools for those who know what they are doing – however, that lack of knowledge often leads to disastrous outcomes.
9. Investing without emergency funds
Emergency funds act as a kind of financial buffer in that they provide ready access to cash in the event of an unexpected expense, such as a medical payment or house repair.
As an early investor in India, it is vital to have a regular income, but without an emergency fund on hand, makes what may seem like a small financial setback will become a huge blow to your savings and investments. That’s why investing without an emergency fund is risky and should be avoided at all costs.
In short, having money stashed away for financial emergencies can give investors greater peace of mind when launching into their investment journey – don’t overlook this foundational step.
10. Having unrealistic expectations
Investing in the stock market can be an exciting and lucrative endeavour for those who are ready to ride the ups and downs of the markets. However, setting expectations based on what you hear about other investors’ returns is a big mistake for novice investors.
The stock market is highly unpredictable; even seasoned investors can make wrong moves that don’t pay off. Being overly optimistic about expected returns can lead to disappointment and unnecessary risk-taking that puts your invested money at greater risk. That’s why it’s important to start small and understand your individual risk tolerance as you grow into a more experienced investor. With research and patience, you will reap the rewards of investing in the long run.
Investing can be a great way to create wealth, but it’s important for early investors to understand the common mistakes to avoid in order to maximize their success. From ignoring PCR ratings, marketing risk, investing without an emergency fund and having unrealistic expectations, there are many pitfalls that can derail a promising investment portfolio.
Opening a Demat account is the first in many steps in building financial security. By taking the time to inform yourself on the basics of successful trading, being aware of these common mistakes, and staying focused on your individual strategy, you’ll be well-positioned for success as an early investor.