A common misconception about stock market is that it is a way to generate quick money. People expect skyrocket returns from the equity market, for they believe that if the need is to attain safe and moderate returns, one can always invest in the traditional investment options such as Gold, Fixed Deposit or Bonds. If one is entering in the stock market then our money should grow at exponential rates otherwise it’s not worthy enough.
This phenomenon is commonly found in budding investors who have barely begun their journey, i.e. beginners who have not spent much time in the market and are unaware of the ups and downs that happen. Here, we talk about three most common mistakes beginner investors do which make it necessary that investing is done with the help of an expert.
FOMO Factor (Fear of Missing Out): Today, news of market action is floating all around us in the media and in the Social Media. There are times when news of a particular stock is circulating continuously which creates an impression in our mind that we may miss the bus and that this is the best time to invest in that stock or we will lose the opportunity. The FOMO factor hits the mind of beginner investors and they end up in buying the stock at higher levels and then get trapped in there for a long time. Investing should never be an emotional response and we should never base our decision out of FOMO.
Penny Stocks: Penny stocks are the favorite of retail investors and for beginners they are literally Love at First Sight. Penny Stocks are those (as the name suggests) which are available at very cheap prices. Beginners are attracted towards penny stocks for two reasons, the first being Quantity over Quality. The beginner investors usually have limited capital, so they look for buying maximum quantity within their budget. So, for example, if they have 3000 Rs in hand, they can buy only 1 stock of a Blue Chip company like TCS, but can buy 300 quantity of Vodafone-Idea in that amount of capital.
The second reason beginners are attracted towards penny stocks is because of the false hope that the stock will rise again to its previous levels and thus become a multi-bagger for them. Most people do not understand that a stock which is 90% or 99% down from its high point is because of a reason. And the reason is that its financials, business outlook etc are poor or unfavorable. Mostly penny stock companies are in bad shape, entangled in legal cases, government litigation, poor business record, bad debt, defaults etc. So there are extremely rare chances that a penny stock may rise again to its previous glory and most beginners end up losing their precious capital or remain trapped in such stocks for a long time.
Poor Portfolio Management: Even if beginners are able to identify strong stocks there is always a risk of not knowing how much to invest in a particular stock or how many stocks to own and to what extent of capital allocation. Different stocks have different risk & return profiles. The risks are also of various types and our portfolio should be properly balanced to safeguard our capital. Of course, risk cannot be reduced to zero, but it has to be managed properly often needing expert advice. DIY investors often look only towards the returns, completely forgetting the risks associated with the stocks they own. Also, stock diversification is a key factor in managing risk and beginners don’t know proper diversification mantras, thus ending up having over or under diversified portfolios.