6 Common Mistakes Beginners Make in the Stock Market

Not Having an Investment Plan

Not having an investment plan means not knowing your financial goals, risk tolerance, time horizon and investment amount. This leads to aimless investing based on market hype or random Telegram ‘Tips’. In the absence of a proper investment strategy, beginners invest in securities that carry higher risk than their risk-taking capacity, mostly resulting in loss.

Hence, before you start investing, have a clear goal in your mind, assess your risk tolerance and have an investment amount set. This will help you create an investment strategy that aligns with your goals and lowers the probability of loss due to reckless investing.

Not Understanding How Investments Work?

Beginners have low faith in their decisions and often have the herd mentality and invest in securities or companies that they don’t understand.

Before investing in any company, you need to understand its business model, how it earns profit and its future growth potential. If you don’t have the time or expertise to fundamentally analyse companies, you can invest in Exchange-Traded Funds (ETFs) or mutual funds. As you gain more understanding of how the stock market works, you can invest in individual companies based on your research.

Letting Emotions Drive Their Investment Decisions

One cannot simply separate emotions from investing, but it is necessary to manage them. Emotions like greed and fear can overrule your logical judgment and force you to make bad decisions based on short-term market conditions.

Beginners often constantly monitor their investments and when they see an unexpected dip, they panic and sell their stocks, thinking they are cutting future losses. Rise, fall, and recovery are the market’s cycle, so it's crucial to take investment decisions based on fact, reason and logic and not emotions.

Not Diversifying Their Portfolio

Having one type of security or stock in your portfolio increases your risk exposure. If the price of that security falls, your entire portfolio is in the red. A diversified portfolio that contains a mix of different securities ranging from high-risk to low-risk instruments and securities with inverse relationships.

If you don’t know how to diversify your portfolio correctly, you can invest in mutual funds to kickstart your investment journey. And build a personalized portfolio later when you have some experience.

Chasing Quick Profits

Stock market investments are no get-rich-quick scheme. Don’t exit positions if you don’t see a significant jump in the stock prices of a company. Investing in the stock market requires patience and aims for slow and steady portfolio growth, which can yield high returns in the long term.

Only highly volatile stocks can offer quick profits, but they also contain the risk of loss of capital just as quickly. For a beginner, stable stocks are a better option before investing in riskier stocks.

Waiting for Consistently Bad Investments to Recover

While some investors sell their investments at the first price dip they see, others refuse to sell their loss-making investment, hoping they may recover. Many wait for their investments to at least break even before they sell them, but if you face a higher risk of further loss if the security is in a consistent downtrend.

It is better to realise a loss than hold it, as the investment may further fall in value and miss the opportunity to invest that capital in another return-generating investment.