last updated on: 25-Nov-2024 09:22PM IST
The Unkown Mistake in the Stock Market that DIY Investors will do?
Introduction
Nowadays, many people invest directly in the stock market, either by analyzing the stocks themselves or by suggestion. As per the article from Economic Times says that there is a 4X times increase in individual retail investors' count in India.
Among the retail investors, all are not making a profit by building a proper portfolio. Let's understand the mistakes most of us are making.
1. Lack of knowledge of the business they are investing
Most retail investors need to learn the actual underlying business and its model, cash flow, cash reserve, revenue, debts, funds the business is allocating to, and market share of the sector that the industry belongs to.
2. Running behind the stock's price or doing it by the technical analysis
Some people just look at a stock's price or run behind the technical analysis and make their investments. The technical analysis may work during the short term but not well in the long run. The stock's price is important but that itself alone is not good to decide whether to invest in it.
Understand the difference between technical and fundamental analysis.
3. Blindly following the social platform suggestions or advice
A lot of retail investors are investing in stocks that are shared or suggested on social platforms like Telegram Channels, Facebook posts, YouTube, etc. The people won't bother about the risks and try to invest in it due to FOMO (Fear of Missing Out). I am not against the information on social media. Of course, social media is the primary source for sharing information nowadays. If we are making a decision for Investments based on social media information, please research and verify the person's or channel's identity.
4. Feeling hesitant to do the fundamental analysis or get paid advice
Most investors do not do the fundamental analysis of the stock like whether it performed well over the last n years, the balance sheet, increase in revenue growth by YoY, decrease in debt, the P/E (price-to-equity), P/B (price-to-book), the increase in ROCE (Return on Capital Invested).
If we are unaware of all those things required to be analyzed, we can simply go for getting paid advice. The SEBI-registered (for INDIA) analyst will help and guide you to choose the right one.
5. Failing to check whether the business is competing with its sectoral peers & solving the temporary issues in business operation or model
If we invest in a stock, that will belong to some sector. There may be many organizations that will do the same kind of business in that sector. As an investor, we must know the peer competitor for the stock we are investing in and how much the total market share our stock holds.
Some businesses will have problems with their model or operations or may have gotten a notice from the government for non-compliance with the rules and regulations applicable to the sector it belongs. It is important to check the administration of the business is solving those issues and bringing them back to normal.
The above Mistakes will lead you to
- Blindly invest the fund at the wrong price at the wrong place.
- Continuously investing in the stock by having the thought of doing average even though the stock is falling without knowing the business is having issues.
- Inability to know whether the fall is because of the market crash or due to the underlying business reasons.
- getting negative returns over the run.
Example
Look at an example illustration of stocks A). invested using proper analysis or by paid advice and accumulated units steadily Vs B). invested by the price of the stock and accumulated units steadily.
Assume, that the right stock was picked after proper analysis and started to invest in stock A slowly at the price of 334.30 and accumulating whenever there is a market crash or temporary fall due to unfavored financial results. The total invested amount and average stock price are illustrated below.
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| Stock A Started Investing in July 2017 |
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| Stock A Purchase History and Appreciation details |
Now assume, that stock was picked by the current market price without analysis and started to invest in stock B slowly at the price of 39 and accumulating when a stock begins to fall.
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| Stock B Started Investing in August 2017 |
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| Stock B Purchase History and Appreciation details |
The above illustrations explain the current market price (low-price stocks) or stocks invested without analyzing the business and its administration will give negative returns over the run even though invested more to average the price during the fall.
Conclusion
Analyze the stock by answering yourself for the above-mentioned points as a checklist. Use Screener, MoneyControl, or any other tools available over the internet to analyze. Try to get the latest news about the business to stay updated. Else get paid advice for your investments.
Once you pick the right stock then you can start accumulating slowly when it is going up and do the averaging as much as possible when it is falling (Good business will fall during the market crash or for temporary issues and will recover over the time)
Be fearful when others are greedy, and be greedy when others are fearful - by Warren Buffet
Happy Investing.
Disclaimer
The above post is not sponsored content. Stock market Investments are subjected to market risks. Please do it at your own risk and discuss it with your financial advisor before proceeding. thefinancefriend.in is not responsible for the loss or risk you have taken.
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