MISTAKES OF AMATEUR STOCK MARKET INVESTORS

Most individuals who are not professional stock market investors not just end up with heavy capital erosion of their holdings, but also suffer interest loss whenever they try their luck with equities. In addition, this experience leads to their all-round personal and professional downgrade. Thus, in our opinion, amateur investors should enter stock market trading only with proper training and guidance.

Let us explore the pitfalls in details –

NO TRAINING FROM EXPERTS

True to the proverb – A little knowledge is a dangerous thing, trading in stocks with no in-depth understanding can put one into serious trouble.

Yes, this limited information is the cause of all harm to the small investor who enters the stocks arena without any prior experience or proper training from experts. Market dynamics are very complicated, conditions volatile where often unique patterns emerge, and even learnings from past experiences may not work. Such is the complexity that one is able to master the market not in years but after decades of experience.

Thus, those desirous of trading must take training from experts and market veterans, many of whom conduct certified courses.

ADDICTION KILLS

New comers in the stock market start as investors, but in no time turn themselves into high-risk gamblers without even realizing what they are doing. Betting is such an addiction that one forgets everything about their personal and professional obligations and the mind remains deeply engrossed in shares and demat holdings. And this leads to wrong decision making and mounting losses as one continuously keeps on executing buy and sell orders in the hope of more profits or to recover losses.

Lack of discipline is another reason for mounting losses. Trading looks enticing and people start taking more and more positions for intra-day or short-term trades.

While excessive buying-selling does not guarantee more profits, at the same time it is harmful too, as it wrecks people emotionally and physically, leading to loss of reasoning powers.

Every addiction is a killer, and compulsive behaviour in stock market too is no exception. Only professional traders can control themselves with restricted trading without losing cool. Hence, first and foremost, amateurs need to avoid this trap.

EMOTIONS RESULT IN LOSSES

Most of us humans are emotional but stock markets are meant for the unemotional. For amateur investors and traders, our emotions prevent us from booking logical stop losses.

Say you buy a share for 200 INR and thereafter the price is on a continuous downward slope. Now when it reaches 180, the buyer thinks why I should sell at a loss. He decides to hold on for another 6 months to a year, when the price further slides to 50. This is when he realizes there is no point holding on to this stock and sells at this level.

Now, had he sold the stock at 180 or 160 much earlier, he could have exited the pick and faced much lesser capital erosion. This is what non-professional investors fail to realize and act upon.

OPPOSITE BEHAVIOUR

Opposite behavioural tendencies of the inexperienced is the cause of all their failure, whereby they minimize profit opportunities and maximize loss.

While the right strategy is to hold on to those stocks which are appreciating till one gets a reasonable return, and keeping a strict stop loss for depreciating scrips to restrict one’s losses, their trading decisions are exactly the reverse of what should ideally be done.

The basic mistake of investors is to exit their holdings at minor differences if the prices go up, but they tend to hold on to their losses as they find it emotionally difficult to book losses. So the loss incurred in one share is often more than the profit registered in 4 different scrips. Moreover, whenever markets correct, the decline is very sharp, but a similar exuberant rise is not usually witnessed if the index jumps higher.

BROKERS TRAP

Stock brokerage business runs on a commission of .3-.5 % of total turnover value on every share you buy and sell. So the more you transact, higher would be the profit of your broker.

Thus, most brokerage houses take unsuspecting first-time stock market participants for a ride to increase their own earnings. The trading system works in a way that if any client has 100 INR as cash balance and 100 INR in price of stock holding with the brokerage, then they are allowed to buy shares four times of the amount. In other words, with a balance of 200 INR one would be allowed to buy stocks worth 800 INR.

This is where most small investors are trapped because of inexperience, who buy shares worth four times of their cash and holding value. The rule is one has to make the payment within two days of purchase or sell the shares to square up the debit value. And if one is able to sell these new purchases within two days at a profit, then it is okay. Often prices fall, and the buyer has to book losses to settle outstanding bills.

And all brokers knowingly play this trick – they ensure their profits keep ticking while their clients continue losing money.

LOSS OF PRECIOUS TIME & MENTAL RESOURCE

Time is the most precious resource in a person’s professional journey.

Trading in stocks and its subsequent mental association with the continuous excitement leads to wastage of energy and loss of valuable time. And as this uncontrolled enthusiasm makes one mad about markets, it turns him mentally unstable, leading to a disharmony in family life.

Buy Time - The Secret of Success

More importantly, for any educated or productive person, trading is a low- grade mental engagement, which is also a serious injustice being done to one’s skills, expertise and capabilities. At the same time, share market returns, if positive, is on many occasions less remunerative than their professional pursuits.

After all, most amateur investors in stock market end up losing money in speculative trades.

NOT AWARE OF INSIDE STORIES

A great disadvantage of amateur traders is their little or no knowledge of inside stories of companies or their lack of understanding in corporate finance. That apart, manipulation in stock prices is very rampant by organized groups of bears and bulls. Based on certain floating news, which people think to be true, they take positions and, thereafter, end up in losses. This is misleading as well, which often traps ordinary traders.

MAY NOT BEAT BANK RETURNS

Contrary to popular perceptions, even seasoned share investors may often fail to fetch better than bank returns. The bull phase is never there in any market forever. There are prolonged bear periods when instead of positive returns, your stocks may quote below buying price, while you keep losing interest as well.

Compare the risk of capital erosion or earning profits lower than bank interests, which again is liable for capital gains tax to an assured 7-8% risk free returns. What can be the best peace of mind than earning a safe and assured 7-8% annual returns on your money in bank fixed deposits, with no chance of capital loss.

The crucial time one saves by staying away from stocks is more beneficial as one can focus more on his core competence areas and earn more and attain higher happiness.

INVEST IN MUTUAL FUNDS

It is true that many people have made handsome profits through the stock market, and equity investing in India is promising as the country’s economy is growing at a rapid pace. But for certain generating profits in stock market trading is not an amateur’s cup of tea.

While those who don’t want to miss the bus of higher stock market returns, yet play safe and remain free, we suggest them the mutual fund route.

Since most people possess neither the knowledge, expertise nor time, the safest option for them is to delegate your investment portfolio to fund managers in Mutual Fund houses who have the most appropriate skills and knowledge to trade your money in stocks and ensure you get a reasonable to good return with a protected downside.

And the biggest advantage is you can start with very small amounts and gradually keep building up. One can start with 100 INR as lumpsum deposit or 500 INR for initiating an SIP.

People with a large corpus of 50 lacs INR and more can also opt for Portfolio Management Schemes.