Investing can be simplified, but it’s not that easy as it seems to be nowadays. The process of buying shares online is easy, but to research and finalize on what basis your investment should be done is tedious.
If you are someone who wishes to invest for the first time in financial markets, below are 5 mistakes that you are likely to make.
Not Doing You Own Research
Before picking your first stock, you are most likely to consult your friends, relatives or anyone who you might be knowing. You might have read here and there, gone through some articles, referred to some videos and summed up everything as a part of your research. But, as you might be lacking confidence, you will seek some advice. The other person might suggest you some other stock or instrument to invest in, which you were not aware of. Instead of looking more into your analysis, you will incline towards the advice given to you and end up losing some amount. It’s not the other person’s fault as the analysis and research they have made would be based on their behaviour towards investing. If a method works for someone, it’s not necessary to would work for you as well.
Using Social Media Extensively
Social media creates the biggest stupid hype around every instrument of financial markets. As it’s free for everyone, each stock has its own critic. A group will defend that the stock has potential to grow further, while the other will assume that the time has come for the stock to correct itself. The more detail you get into, the more confused you will be on what to do next. When a stock is buzzing on social media, it’s more likely that its direction is fixed, either going up or crashing down (more likely to go up). But once the buzz is over, the stock comes back where it was before.
Getting Into Concepts That You Don’t Understand
Those who are knowledgeable about stocks, are also aware about the concept of derivatives. Awareness doesn’t mean knowledge. People make tiny consistent gains in stocks and then enter into derivatives, which results into heavy losses. I won’t go into the details of derivates, but they are very risky and require a lot of knowledge followed by experience to be profitable.
The latest concept is Cryptocurrency. A lot of people are having FOMO (fearing of missing out) in crypto asset. One thing is for sure, most of these people don’t know about how crypto works and they are mainly worried about it because of social media. Pro Tip: If you still want to invest, go with very low amounts.
Never invest in a business you cannot understand.Warren Buffet
Investing Using Borrowed Money
If you are someone planning to invest money borrowing from someone and offering them decent returns after deducting your cut, don’t do it. There are people who take loans to invest in markets. What they don’t realize is, pay interest on loan is confirmed, getting returns from markets in uncertain. You are creating a liability which has to be paid off by hook or crook, but you plan to offset that liability from something which isn’t constant. You might end up losing a half of your invested amount and now, you have to return what you took plus interest.
Going All In / Not Diversifying
Never keep all your eggs in one basket. Yes, that’s true when it comes to investments. Diversification helps to reduce risk. Cashing in all your money into one stock and if it backfires, you will have a tough time. If you are a long term person, you need not worry, but if you have caught a falling knife, who is going to save you? If you believe the stock will go up despite negative quarters, simply start diversifying instead of buying more shares of that company. This way, your portfolio will turn green irrespective of a particular stock going red and if your conviction is right, that falling knife would ultimately give you positive returns.
It’s okay to make mistakes. Everyone does it. But not learning from your mistakes and keep making them again and again will eventually pull you down. Study, analyse, try stuff, learn new concepts, start with virtual trades and then once you get confident on yourself, start your journey.
Avoid stock tips from unverified sources, WhatsApp messages, telegram channels and believe on your research.
Thank You For Reading!
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for dstreetanalyser.com in order to promote financial literacy among the general public.