5 Common Mistakes by First-Time Investors Make
Investing usually seems like a stress-free side hustle. However, first-time investors often find that the truth is far from this myth. Investing takes time, effort and patience. Investing in the stock market can be tricky and can cost you lots of money if not paid attention to.
First-time investors are too eager to invest, and quite often, do not commit to learning from the mistakes of others. Fortunately, by reading about the common investment mistakes most investors and traders are prone to, you can avoid making those errors.
Here’s a quick look at the 5 most common investment mistakes first-time investors are often guilty of:
Lack of Planning
Seasoned investors tend to have a plan based on facts and figures. First-time investors, however, often give into treating the stock market as a gamble. The downside to not having a proper plan in place is that there is no end goal, thus making your investment pattern erratic, turning you into a reckless investor, resulting in greater losses.
The simplest way to keep yourself from making this investment mistake is to take some time to make a financial plan before investing. Identify your goals and pick a strategy. Look into the financial data of companies you plan to invest in, and make informed decisions.
Personal Bias
Beginners trading in equity let personal bias drive their investment decisions. For instance, many first-time investors tend to either only buy companies they know or companies they like. This proves to be ineffective as companies you know or like may not always be the ideal investment options for your risk profile or your financial goals.
One way to avoid allowing personal bias is to focus on research and obtain financial information about the companies that you’re interested in. Research-based investing can help you overcome any bias thus helping you make informed trade decisions.
Refusal to Cap Losses
Beginners tend to hold stocks and financial assets even when they’re not performing well. If a stock’s value is degrading, many first-time investors and amateur traders are prone to refraining from selling the asset hoping that its value would shoot back up in due time. In most cases, this may never happen, leaving investors with significant losses.
You could set a limit for losses, beyond which you will have to sell off a loss-making stock, thus limiting your capital erosion. Many trading platforms like the ones offered by IIFL come with a specific stop-loss feature exclusively for this purpose, so you can set a specified price at which to sell your loss-making stock.
Short-term focus
The idea that investing in financial assets or trading in equity makes you richer quickly, limits your focus towards the future, thereby stopping you from thinking about the long-term effect of your investment decisions. This could be extremely damaging to your financial future. To make steep profits in a short period, many first-time investors make rash and uninformed decisions, generating more losses than profits.
Write your short-term goals and your long-term goals, and make a plan for the future. Pick an investment strategy including pointers and guides for the long run. Additionally, ensure that you have at least some long term (usually 5 to 10 years) investments in your portfolio to maximize your profits.
Inadequate Diversification
Failure to diversify your portfolio can also cost you significantly in the long run. Diversification is important because it balances risky assets against more stable options. Thus, your capital won't be eroded entirely. Investing solely in one class of assets such as equity or commodities increases the risk and even if you’re a risk-friendly investor, it’s not advisable to put all your money in one basket.
The easiest way to avoid committing this investment mistake is to gradually build up your portfolio to include short-term and long-term investments. You also need a mix of high-risk and low-risk investments, so your risk is managed across your portfolio.
Conclusion
These are among the most common mistakes first-time investors make when they trade in equity or purchase financial assets. Adequate research is the bread and butter to make informed decisions grounded in facts as opposed to instinct or emotions. One needs to open a Demat account and trading account to kick-start their investing or trading journey. Trading in equity and investing in the financial markets requires the use of a Demat account and a trading account. It also requires you to link your online Demat account with your trading account, so you can buy, hold, and sell your financial assets as per your investment strategy