Although there are many investors who are enthusiastically investing in the Indian financial markets today, investment is not child’s play and it requires discipline and planning before you make decisions. The current digital age presents a myriad of investment opportunities and investors can often get overwhelmed and compelled to invest in avenues that may not be suited to them and their unique financial aims and requirements.
Do Your Investment Research
The only way to mitigate your risk in any investment you make is to do some diligent research in advance. Whether you are considering investment in the stock markets or mutual funds, you must educate yourself about the pros and cons of any investment instrument and make informed decisions. Ignoring this may lead to losses in the future and once you make the wrong decisions in your investment, it is very hard to backtrack as there are finances involved. For instance, if you are investing in a stock you hardly know about, you may miss out on vital information about its growth prospects and finally end up with a sinking ship instead of the potential gains you expected.
Common Beginner Investment Mistakes (and How to Avoid Them)
Whether you are a novice or an experienced investor, the following mistakes may be made as you are only human and it is possible to slip up now and then. Nonetheless, beginners tend to make more mistakes than experienced players as they are new to the investment ecosystem and are eager to make money fast. Here are some key mistakes you may make and ways to avoid them:
- Investing Without Knowledge
If you do not grasp the nature of the investment instrument/product you are investing in, you could possibly be making errors in judgment and this is a mistake. In order to invest properly, you should have complete knowledge about your investment, its potential risks, potential returns, and how the investment works overall. For instance, investing in cryptocurrency requires specific knowledge, and not everyone understands it. Yet, many youth clamour to invest in it due to the media hype around it. You may not understand an investment instrument at first, but the least you can do is educate yourself about it before you invest.
- Running After “Hot” Investments
Several beginners in the investment game take advice from friends and family before they invest. This is because such channels of information are more convenient than doing one’s own research and analysis. Furthermore, beginners may trust such sources, but they make the mistake of blindly investing without doing their own homework.
What’s more, with so much buzz on social media and practically every young person having some account or another, it is easy to get swayed by “hot” investments that are in the limelight or being discussed. For instance, instead of investing in a stock based on your friend’s advice, it is worth doing your own evaluation of the company’s business model, its fundamentals, growth prospects, past performance, etc., before you invest.
- Misinformation and Downside Averaging
Where stock investing is concerned, beginners always assume that it may be worth investing in a stock whose price is on the downside. This is done with the hope (or assumption) that they are buying at low prices and when prices eventually rise, they will stand to make profits. What’s more, investors not only make the error of buying stocks at low prices, but they buy more stocks assuming that their average investment cost will go down as they will eventually sell a bulk of shares when prices increase.
The obvious mistake here is that the price of any stock is affected by several factors and prices may not rise at all but may go down even further. Price is not the only factor to consider while investing in a company’s stock. Various elements have to be evaluated, like company fundamentals, growth prospects, standing in the industry, and other important aspects of the company’s overall performance.
- Investing the Capital Set Aside for Needs
A common error that beginner investors may make is using the money they have set aside for needs like daily living expenses in investment. Early investors may get tempted to risk these sums in investment channels like stocks or mutual funds. However, they stand to lose their daily living expense capital if they make losses. The trick is to make investments with the funds you have not set aside for needs, but use only those that you may have put aside for your wants or any surplus cash you may have.
- Allocating Your Funds to a Single Instrument/Investment Avenue
Related to portfolio diversification which is the catchphrase of investment advice that any expert will give you, is the fact that investors make errors by allocating their capital to one investment area. The key to fruitful returns and mitigation of risk is to spread your investment over a gamut of geographies and sectors, as well as different investment instruments. In this way, if some instruments and areas don’t do well, you may balance your portfolio with returns in others.
Think Before You Leap
Now that you know what mistakes could be made, you can go ahead and invest with the knowledge of hindsight from potential errors you could end up making. Your goal should be portfolio diversification with minimal risk taken. Additionally, education and information can give you an edge and you may come out winning with your decisions.
