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5 mistakes to avoid when you are investing in the stock market

While the stock market is a great avenue for creating long-term wealth, it is also known to be quite risky as well. If you’re new to investing in the stock market, it is advisable to be extra cautious seeing as you’re still learning the ropes.

In a bid to help you navigate the tough and tricky waters of the stock market, we’ve come up with a list of 5 of the most commonly made mistakes that you should avoid when investing. Continue reading to find out what they are.

1. Investing with the mindset of a trader

Being a beginner to the world of the stock market, you may not be aware of the difference between online stock trading and investing. Yes, you read that right.

Although investors usually use the terms investing and trading interchangeably, they’re both not the same. In fact, there’s a huge difference between the two. Online trading is more short-term in nature compared to investing in the market, which usually spans over a year or maybe even more than that.

Traders usually buy a stock, hold it for a certain period of time and then sell it for a profit. This is what experts call a trader’s mindset. That’s not all. Traders generally tend to get rattled by volatility and adverse price movements, which leads them to sell prematurely, even at a loss sometimes, to preserve their capital.

Getting into the stock market with this kind of a mindset is one of the biggest mistakes that investors can make. On the contrary, as an investor, you should look towards investing in the stock market with a long-term view.

And since investors have a long-term view in mind, they generally don’t pay much heed to volatility and continue investing in the market irrespective of the current market movement. In the long-run, investors generally tend to do better than traders.

2. Becoming emotionally invested in a company

This is a classic mistake that many beginner investors tend to make. They tend to pick a company and stay with it irrespective of its performance. This is something that you should never do since getting emotionally invested can derail you from satisfying your financial goals.

Once you’ve invested in a stock after much due diligence, continue to monitor its performance throughout at regular intervals. Look for red flags like signs of financial irregularities, consistent financial losses, corporate governance issues or lapses, and frequent senior management changes.

And if you notice any red flag, don’t ignore it due to your emotional connection. Rather, take a firm decision with your financial goals in mind. This way, you can ensure that you don’t unnecessarily get caught up with any avoidable losses due to your strong emotional connection with the company.

3. Relying too much on stock recommendations

There have been many instances where beginner and experienced investors alike have experienced losses after investing their hard-earned money on stocks based on recommendations.

There’s one thing that you, as an investor, should always keep in mind. The stock market is very quick to discount every little piece of new information. And so, any recommendation that you might receive from your friends, stock analysts, and others may have already been factored by the market. Under such a situation, relying on these recommendations to invest in may not always turn up results that you would expect.

Another reason why you shouldn’t give too much importance to stock recommendations has to do with the difference between your financial objectives, risk appetite, and investment methodology and that of the individual giving the said recommendation.

Therefore, when you receive any stock recommendation, always take it with a pinch of salt. Also, make sure to do your own due diligence and analysis of the stock first. Only invest in the company if it aligns with your profile and objectives.

4. Emulating the stock portfolio of another investor

Just like how it is non prudent to rely on the stock recommendation of another individual, it is equally not advisable to emulate the stock portfolio of another investor, no matter how successful they may be. This is a recurring mistake that many investors make with the hopes of generating the same kind of returns that the successful investor enjoyed. However, doing so may not always give you the results that you expect it to.

There are many reasons why one shouldn’t use the same approach or invest in the same portfolio of stocks as another investor. Here’s a quick look at a few of them.

Determining the point of entry is next to impossible, which is something that can be very important when investing in stocks.
The investor’s profile, risk appetite, and financial objectives may not match with yours.
There’s no way of knowing the investors entire portfolio since it may not always be shared with the public.

Therefore, it is a good idea to stay away from emulating portfolios. Instead, do your own due diligence and pick stocks that are likely to work for you and help you satisfy your financial goals.

5. Not having a diversified portfolio

Many investors tend to focus only on one or two industries when investing in the stock market. However, this is akin to putting all your eggs in one basket. If the industry in question underperforms, your portfolio will likely take a huge hit. That’s why it is important to diversify your portfolio.

Diversification spreads the investment risk across multiple stocks from different industries and sectors, thereby reducing it significantly. So, as much as you would like to invest in stocks from a few industries, it is advisable to refrain from doing so. Instead, invest in multiple different stocks across industries. This will ensure that your portfolio doesn’t take a huge hit even when a few sectors underperform.

Conclusion

With this, you must now be aware of some of the most common mistakes that you should avoid when investing in the stock market. If you’re thinking of starting your stock market journey through investing or online trading, make sure to first have a demat account in place. Without it, you cannot trade or invest in the stock market. Get in touch with Motilal Oswal right away to open a demat account for free.