10 Mistakes a beginner should avoid

by J Victor on December 2nd, 2011

Hi there.

Here is a list of faults that beginners in stock market usually commit. These are very common mistakes that eventually result in financial disaster. Investors who recognize and avoid these 10 common mistakes give themselves a great advantage in meeting their investment goals.

Your broker will always encourage you to go ahead with margins, explaining it’s potential to make big money. His target is to squeeze out maximum brokerage from your account. At any cost, you must not fall to this trap.

Worst still, I have heard of people pooling money. forming partnership firms or companies and getting into investing business. Their idea is to make it big at the first move itself. Such strategies never work out. All these are not recommended.

JUMPING IN HEAD ON

The whole process of investing boils down to one simple theory- Buy low and sell high. World over, investors and experts still make mistakes in  finding what is low and what is high in a market where everything hinges on different readings of a variety of ratios and metrics. What is high to the seller is considered low (enough) to the buyer in any transaction, so you can see how different conclusions can be drawn from the same market information. Because of the relative nature of the market, it is important to study up a bit before jumping in.

The right price for you to enter would depend on the time frame you intend to invest, the rate of return you want and the amount and risk you are willing to commit. It’s never the same for two investors. It’s important to realize this.

FOUNDATIONS FIRST

At the very least, you must  know the basic measurements and it’s meaning such as book value, P/E. Market cap, support and resistance, all time highs. 52 week highs, 52 week lows. stock indices, volume, etc. and understand what these figures mean. The more you learn, more youll find that the market is much more complex than a few ratios can express, but learning those and testing them on paper can help lead you to the next level of study.

PATIENCE, PATIENCE.

Let’s assume that you decide to enter the market with a newly opened account, committing Rs 1 lakh to it. It’s not necessary to start investing from day one. If you are in a bull market, may be you’ll have to wait 3 or 6 months until a correction unfolds. It’s important to be patient.

SHORT TERM AND LONG TERM.

‘Short term’ is a really short period for most of the people. I have talked to many investors on this. To many of them, a short term is time frame of 3 to 6months and a long term is time frame of 1 to 2 years.  If that’s your idea about short term and long term, you need to correct yourself. A short term is generally referred to a time period less than 3 – 4 years and a long term is a time frame above 5 years.

If you buy a share for Rs 50 and sell it for Rs 65. your profit from the transaction is not Rs 15, but an amount less than that. That’s because of the brokerage expenses involved in it. You must also consider the effect of income tax and inflation and calculate the actual profit you make, before taking a sell decision.

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