5 Common Mistakes First-Time Investors Make

Lack of Planning

Seasoned investors tend to have a plan based on facts and figures. First-time investors, however, often give into the guessing game and blindly invest in stocks that appear to be performing well. The downside to not having a proper plan in place is that you have no end goal, and as a result, your investment pattern can be quite erratic. This, in turn, could turn you into a reckless investor, resulting in greater losses if you’re not careful.

How to avoid this mistake:

The simplest way to keep yourself from making this investment mistake is to take some time to chart out a financial plan before you begin investing. Identify your goals and pick a strategy. Look into the financial data of companies you plan to invest in, and make informed decisions as opposed to blind guesses.

Personal Bias

Beginners trading in equity are prone to allowing personal bias to drive their investment decisions. For instance, many first-time investors tend to either only buy companies they know or companies they like.

This is clearly not the best way to go about investing or trading in equity, because companies you know or like may not always be the ideal investment options for your risk profile or your financial goals.

How to avoid this mistake:

One way to avoid allowing personal bias to rule your investment decisions is to focus on research and obtain financial information about the companies that you’re interested in. Research-based investing can help you overcome any bias you may possess, so you can make unprejudiced and informed trade decisions.

Refusal to Cap Losses

Beginners also tend to hold stocks and financial assets even when they’re not performing well. If a stock’s value is plummeting, many first-time investors and amateur traders are prone to refraining from selling the asset in the hope that its value would shoot back up in due time. In most cases, this may never happen, leaving investors with significant losses that could erode their capital greatly.

How to avoid this mistake:

You could set a limit for losses, beyond which you will have to sell off a loss-making stock, thus limiting your capital erosion. Many trading platforms like the ones offered by IIFL come with a specific stop-loss feature exclusively for this purpose, so you can set a specified price at which to sell your loss-making stock.

Short-term focus

The idea that investing in financial assets or trading in equity can make you get rich quickly can often limit your focus to the near future alone. This stops you from thinking about the long-term effect of your investment decisions. And that could be extremely damaging to your financial future. To make steep profits in a short period, many first-time investors make rash and uninformed decisions. And these are more likely to result in losses.

How to avoid this mistake:

Write out your short-term goals and your long-term goals, and make a plan for the future. Pick an investment strategy that includes pointers and guides for the long run. Additionally, ensure that you have at least some investments in your portfolio that you plan to hold for 5 to 10 years, at the very least. This could maximize your returns greatly.

Inadequate Diversification

Failure to diversify your portfolio can also cost you significantly in the long run. Diversification is important because it helps you balance risky assets against more stable options. This way, your capital doesn’t stand the possibility of being eroded entirely. Investing solely in any one class of assets such as equity or commodities increases your risk by a significant amount. And even if you’re a risk-friendly investor, it’s not advisable to put all your money in one basket.

How to avoid this mistake:

The easiest way to avoid committing this investment mistake is to gradually build up your portfolio to include short-term and long-term investments. You also need a mix of high-risk and low-risk investments, so your risk exposure is distributed across your portfolio in a healthy manner.

Conclusion

These are among the most common mistakes first-time investors make when they trade in equity or purchase financial assets. It pays to remember that the assets linked to the financial markets may fluctuate in value. So, your best bet to make the most of these investments is to perform adequate research and make informed decisions grounded in facts as opposed to instinct or emotions.

Apart from these tips and tricks, there are a few more factors one would need to keep in mind before getting started. Before novice investors can begin to invest, they would, first and foremost, need to open a demat and trading account. Trading in equity and investing in the financial markets requires the use of a demat account and a trading account. It also requires you to link your online demat account with your trading account, so you can buy, hold, and sell your financial assets as per your investment strategy.

Armed with all the aforementioned knowledge and guidelines, you’re now all set to begin investing.