Tips for Amateur Investors

When a young investor enters into the market, he/she aims to derive a good return from their investment. The best part of entering the market at a younger age is that there is a huge scope to learn new things that’s happening around. Incase of any wrong decision, it can be taken as a lesson. However, in case if there is money involved, it could at times result in severe consequences. Entering the market at a younger age provides flexibility as well as time to take risk and recover from losses.

Let’s understand some of the common error made by these budding investors and tips to avoid such error.

Getting Frightened because of falling prices of the stocks in the near-term:

The most common feature which is seen in an amateur investor is that they get scared when the stock price starts falling. Because of this fear, they sell the stock in a short span of time.

Tips:

• Try investing your money in small batches and do not check on the stock frequently. This would help investors to stay calm and not get discouraged.
• Block your calendar, let’s say every 15th of the month to check the portfolio and simultaneously focus on long-term gain.

Diversification:

Another blunder that amateur investors make is that they do not diversify their risk by investing the money into various stocks.

Tips:

Diversification is a strategy which helps in mitigating the risk of the portfolio. Below are specific tips which can help in building a successful investment portfolio.

• Define the objectives of the portfolio. It is very important to know what you expect from the money that will be invested as well as the risk appetite of the investor.
• Consider adding index funds or fixed income funds to the portfolio. This helps in preventing the portfolio against market volatility and uncertainty.
• Continue building the portfolio regularly by dividing the total amount to be invested in purchasing the targeted asset. This reduces the effect of volatility.
• Should keep a track on which stocks to get out.

Spending too much on fast growing Stocks:

Amateur investors are seen investing too much on the fast-growing stocks. These stocks generally belong to companies in the emerging stage. There is no doubt that investment in these companies makes a huge gain. However, there is always a certain level of risk involved which should be noted by these investors while investing their hard-earned money.

Tips:

• Diversify the funds into multiple stocks. This will help in mitigating risk.
• Do a proper valuation of your portfolio. Simply buying hottest stock of the day or strongest company without any proper valuation might result in fall in value, while the market rises.

Investing in the company in which they do not have an idea:

Amateur investors are seen investing in companies in which they do not have any clue. They make an investment based on the data collected through some secondary sources like market buzz, news etc.

Tips:

• Do homework on the stock of those companies in which you want to invest. Do not buy any stock in case you do have an idea about their business model.
• The other option is that construct a diversified portfolio which comprises of ETF or mutual funds.

Having a soft corner for any particular stock:

Most amateur investors have some or the other stock, which are their favourite one. Here the thing which skips from their mind is that the stock which he/she has purchased is for the investment purpose and not to keep at safe in their portfolio.

They refuse to change their mind as they are emotionally attached to that particular stock. They are not ready to sell that stock even if the stock is not doing well, and the company is reporting some severe issues following to the share purchase.

Tips:

• In case you find that the fundamentals of the company require you to sell the stock, then sell the stock instead of keeping it in your portfolio.

Worrying about political changes:

There are some or the other political issues in every nation which no doubt impacts the share market as well. However, it should be very clear that it will impact the share price for a shorter duration.

In case of any political disturbance, in most of the cases, it is seen that these amateur investors start selling their shares in anticipation that the share price will further crash. This results in huge losses.

Tip:

• Do not take decision based on the political condition prevailing in the country. One should not worry about any political event as if it occurs for a short span. Selling stock in such a scenario might result in huge losses.

Buying stocks at a cheaper price:

Amateur investors believe that buying shares at a cheaper price make them feel that they are getting the stock on sale. However, they forget that the scenario rarely works.

Tip:

• In case any stock is down for some reason it should generally be avoided, unless the reason is repairable, as it can result in huge losses.

Selecting stocks:

Stock Selection is an important step before making any investment. It requires a little bit of homework. An amateur investor should know about the stock’s fundamental factors and its importance.

Tips:

• Before selecting a stock, do a thorough study.
• Look for earnings growth over time. If earnings are increasing periodically, it means the company is doing well.
• Check for the market volatility.
• Look for relative strength in the industry and see if the industry has future potential or not.
• Have an idea about the company’s debt to equity ratio, price to earnings ratio.
• See how the management of the organisation performs?
• Look for corporations paying dividends. A company which is consistent with respect to the payment of dividend are often the one with a certain level of stability.

Lacks understanding of the overall market direction:

Amateur investors make losses when they do not understand the overall market direction. They are not able to recognise when there is a possibility of market decline or is there a new uptrend.

Tips:

• It is essential to know that market movement and major changes to protect your account from significant losses.
• It is also important that the investor must know when the correction is over, and that the market is giving a buying signal. Selecting stocks based on feelings and opinion is not a great idea. There should be some rules which need to be followed consistently.

Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.