When I started investing in stock market, most of my family member told, it is pure speculation and anything can happen there. When most of the people say things with so much conviction then we start believing them. Do not think that the people who are investing are just gambling.
Some gamble but most of the people who invest with an idea and proper research bear good results in long run.
Today I want to share some of the common mistakes done by the new investors
- They Buy on High and sell on Low:
Most of you will not believe that this could be true also. But let me tell you investors lose only because they buy at high and sell at low.
Let’s take an example of a stock.
Stock price at 11 Jan,18: Rs 41
Stock price at 13 Mar,18: Rs 32
% Drop in price: -21%
So now let us understand why an investor bought this stock on 11 Jan
There were a lot of positive factors which made the investor greedy. As pharma and IT are the only sectors which are trailing at a low valuation, this stock seems to be a good bet. A lot of analysts are recommending to buy this stock. Moreover, Morepen labs received USFDA nod for an asthma drug. This approval will give the company an entry into the 2000cr market. Everyone is now super bullish and is willing to pay any price to get the share.
The last and most important stock has delivered 170% return in just 10 weeks.
When so much action is there in the stock, no investor wants to miss the momentum.
Why an investor should not have invested in the stock
On Jan 18, At a price of the stock was 41, trading at 70 PE whereas Industry PE was 30 only. IT & Pharma are at low valuation does not mean that every other stock is trading at cheap and trading at a low valuation.
Let us check the profit of the company.
Present trailing (standalone) Net profit is 29.67 whereas Mar 17 was 23.04. This is just a 30% increase in profits whereas stock prices just doubled till Dec 17. The price got inflated too much with a lot of positive news and recommendations. But the valuations became very high and were expecting very high earning of the company.
Therefore it is very much necessary an investor should not take an unwanted risk by paying up high prices at overpriced valuations. It is better to sit on cash under such circumstances.
Warren Buffett has said: Price is what you pay, & value is what you get.
- Retail investor panic very easily and most of them believe the rumours
In investment, one should be aware of the time horizon of own investment. One should not invest the money in equity which is needed within 1-2 years. Equities are meant for long-term investment.
The market will climb and fall but an investor should not react with it. We should believe what is correct. Fundamentally India is growing country and it will witness double digit growth in few years. If there is a good correction in the market like the present situation when the market is around 10200, an investor should not miss investing opportunities like this.
People will say the market will go to 10000/9000 or even 8000. This refrain investors to buy at the current situation. Do remember if investing were to be such an easy, everybody could have been warren buffet. It takes patience and systematic investment to create wealth.
When you are not sure how much market can fall, invest some percentage of your capital and invest more when the market goes down. The main thing is nobody can catch the bottom or the top.
Buy when others are fearful and Sell when they are greedy. This is the mantra which can help anyone to create wealth from the stock market.