Most of the investors face losses in the initial stage of investing because it takes time to understand and learn about the stock market which helps you to become a successful investor. Today we will discuss a few mistakes that new investors should avoid which most investors commit and face losses.
These mistakes should be avoided. We must be aware that we are investing in a particular business through the stock market rather than an individual stock.
When you are buying any shares in a company then you will even be a part-owner of that particular company as a shareholder.
Top 5 mistakes that new investors should avoid
Let’s take a look at the top 5 common mistakes.
Mistake #1 : Depending on share price while investing
In the long term, the share price is dependent on the business performance of a particular company. In the short term we may face fluctuations but in the long-term share price is dependent upon business growth.
Let us take an example, Reliance power business has been performing badly in the market for a long time. The business performance in the long-term is bad so share prices have even dropped to lifetime lows.
However many people have invested in Reliance power after the price fall citing the reason that the share price is cheap now!
Whenever you think of investing, you must understand the company’s business and analyze whether it can perform in the long term or not. Most of the people check the share price’s performance and start investing in it, which is a wrong process of investment.
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Mistake #2 : Holding on a share which is dropping down
We should not continue holding on to a share that is dropping down because of the bad performance of the business and lack of faith in these businesses.
For example, some people invest in JP associate or reliance communication companies whose fundamentals are low but still they keep on holding for the long term. By this, you will get huge losses as well as you will lose the opportunity cost.
We should not hold in hope that it will recover when the company is not performing well. We must invest in a business that performs well in the long term.
Mistake #3 : Investing on stocks which are low priced
Most of the new investors think they can buy only a few shares if they invest in high share price and they invest in low priced stock.
We should not invest in shares whose share price is below 50 rupees simply because it is trading at a low price. Returns are calculated in terms of percentage.
A 1000 rupees stock may double to 2000 rupees while 50 rupees stock may even fall to 25rs. So, we must find a growing business irrespective of the price of the share.
Mistake #4 : Investing in stock to average out share price
We should not invest in shares of the same company which we have invested in and are in loss, to make the share price average, unless it is having really strong fundamentals and good growth prospects. It is okay if the company is undervalued and low price but we should not commit many mistakes to hide a single mistake.
When Jet Airways price dropped from 250 rupees to 150 rupees, people who have already invested in shares again invested in Jet Airways to lower the buying average price and lack knowledge of business performance.
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Mistake #5 : Investing without learning and not understanding company’s management
We should make an in-depth analysis of the company in which we want to invest. We should not invest by just reading about the company in newspapers or media.
We should learn and understand business, ethics, products, services and corporate governance. We should invest in such companies who adopt changes and tackle them to avoid losses.
When you start investing in the stock market you may not earn profits because the market and company is new to us. We must learn something from our losses, analyse the company and gain profits.