New Investors Should Avoid These Common Mistakes
Written on Saturday, November 25, 2017
By Vishwajeet Parashar - Sr. VP & Group Marketing Head
Investing in equities has never been much simpler than this. Online brokerages allow participating in the equity markets sitting from your home or office. You can open a trading account by filling a single application form which would include opening or integrating your bank account and the demat account.
Once registered, you may buy or sell from among hundreds of stocks listed on either the National Stock Exchange or the Bombay Stock Exchange. But, you need to decide your approach- whether you want to invest for long-term. More than that, you got to learn from the mistakes that seasoned investor had done earlier. Here are few of them to take note of and learn from them to avoid burning your fingers when the tide hits the shore.
A booming stock market brings out the herd mentality in most investors. The flavor of the recent upswing is the mid-cap category of stocks and even new investors are lapping them up with no or less homework.
A first-time investor is most vulnerable to the exuberance of stock prices and is most likely to damage one’s finances. Buying decision solely rests on what others are buying ignoring the industry and company specific factors altogether. By following the herd, one goes against the basic principle of investing which is to do a fundamental research on the stock and then buy when prices are low and sell when prices are high.
A new retail investor looking to ride the wave in all probability would witness erosion in his investment. This would largely because he would enter the stock when it is already at a high in terms of its valuation. By this time, big investors and institutions would start off loading and exit the stock thus leaving a later entrant trapped at higher levels. Do not fall into the trap wherein the market sees higher levels while your equity portfolio shows lower returns.
Early Gains and Early Exit
First-time investors without proper plan-in-place tend to enter for early gains and if prices see corrections very early, they tend to exit soon. Prices would never move in straight line and will show volatility at each stage. Even a notional loss could bring jittery to new investors. They should instead, have a holding period in mind along with a cut-off price to initiate a re-look at the stock.
It is highly probable that the first stock that a first-time investor buys would be the one which is readily available and has vividly displayed information. Either the company is a popular one or the stock is on everyone’s lips. Further, it’s likely that one gets swayed by information provided by the popular media forums providing opinions on the way the market will behave and making stock recommendations. Remember, lot of such predictions and tips are based on the movements of the market indices. One will have to start learning to differentiate between information and knowledge.
Already a spate of IPO’s has been announced by various firms and more could be there in pipeline. SEBI too has recently come out with measures to revive the primary markets. If the secondary markets gain momentum and the atmosphere becomes conducive, firms jump into the primary market to raise funds from public through the IPO route. It’s important to be cautious with IPO’s, especially for new investors.
It’s always a big temptation to get hold of a stock at its listing price and then see the price move upwards. But, in reality, it is not so. By the end of trading on the first day of listing itself, the price could fall down listing price. This may happen within weeks or even months. IPO investing has its own share of risk and could be more than investing in stocks already being traded in secondary market. The future price movements in secondary market would largely depend on the objectives of the IPO.
The offer price in IPO’s is typically priced higher. And promoters gain because of this. If a stock is already priced high, its valuation makes it expensive after its listing, with not much upside left, retail investors especially first-timers could be left out in the cold. Invest in IPO only if one is convinced about its financial and future growth and certainly not the hype surrounding it.