While it might not be possible to be always right while investing in the stock market, one must avoid making common mistakes. SundayET lists some mistakes that one can and must avoid while investing.
There’s a common belief that a share with lower price is cheaper and can multiply faster. However, one forgets that the price in rupee terms is not the right criteria to decide which stock is cheaper.
According to Kishor P Ostwal, CMD at CNI Research, this is the psychology of small investors and also one of the reasons why they may not be able to buy stocks in lots of a company whose share price is high. However, one should look at price to earning (PE) ratio and other fundamental factors to judge.It is usually seen that companies with relatively low share price are less traded and hence less liquid. Even the BSE 100 companies show a similar trend.
For instance, 50 companies with lower share price had a trading volume of Rs 1,468 cr, whereas, the other 50 companies with higher share price enjoyed a trading volume of Rs 1,849 cr on September 2. In fact, a similar trend has been observed in the last one month. Hence, one may face difficulties in selling very low priced stocks.
Many investors also get attracted towards stocks that have been witnessing a price rise, thinking that the rally will continue. However, by following this strategy investors end up buying shares at a very high price or end up with losses.
Also, one must understand that the same stocks and sectors will not continue heading north. Under any given economic condition, only a few sectors and stock do well. As soon as the economic scenario changes, new sectors and stocks shine out.
For instance, during 2007, metals, capital goods, oil and gas and realty outperformed the Sensex, whereas, these underperformed the Sensex during 2008. While, BSE Realty and BSE Metal lost as much as 83% and 74% in 2008, they appreciated by 70% and 119% in 2007, respectively.
Blind faith in a particular person is a sure shot way to lose money in the stock market. Several brokers and financial planners say a large set of investors tend to believe strongly in their advisers and follow them religiously.
Also, there is a belief among a few investors that if a particular investment bank comes out with an initial public offering the market price of that stock will never come down below the issue price. All these are misconceptions. One should not believe anyone blindly when it comes to investing your hardearned money.
Stock tips are enchanting for investors. Relationship managers (RM) send stock tips on a daily basis to ensure that their trading targets are achieved. Many of these tips don’t even come from the research desk that brokers have.
Investors willing to make serious gains should avoid these tips as these are in more favour of RM than investors. One must do a thorough research before investing in any stock rather than just seeing the SMS sent by his/her RM.
Also, it is seen that generally people go for a second opinion before investing. A broker who did not wish to be identified said, “Many of our clients are very intelligent and have a good understanding of the stock market. But even after doing a detailed analysis, they always ask their RM that ‘chalega na’ (will it go up) and the answer is always yes.”
“Taking a second opinion is not a bad idea but one must seek a second advice from the right person,” Ashish Kapur, CEO of Invest Shoppe India, said.
Never get carried away by vague terms such as long-term and shortterm. Ask an investment adviser and he will advise you investing for longterm. The words long-term or shortterm do not say anything. One must be very particular about the investment horizon. According to Kapur, rather than following such terms one should have return estimation in mind and strictly follow that.
Since, prices may not continue moving up, one should not be greedy and the moment a stock touches the targeted level one should exit. Similarly, one must know how much loss one can afford to absorb.
Once prices fall below that level one should get out of it rather than turning it into long-term investments to avoid booking the losses. If the investment objective is very important like children’s marriage or education, it is better to invest in other financial instruments.
Many small investor believe that shares with lower price are cheaper and can multiply faster.
Look at PE ratio to decide which stock is cheaper. Cos with relatively low share price are less traded.
Don’t get attracted towards any stock by just seeing its rising price. Don’t have blind faith in a particular person. Stock tips are enchanting but may not be in investors’ interest.
Seek second opinion from the right person. Rather than following a long-term or shortterm strategy, have your own return estimation.
Know how much loss you can afford & sell if prices fall below that target.
Source:economictimes.com
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