Hello folks, welcome to CCB. In today’s post I’ll be talking about stock market mistakes to avoid.
The first mistake most people make is picking a stock just because it’s cheap. This often happens with respect to small caps. A stock at ₹5 may seem pretty good and affordable, so many choose to buy them and often people buy them in large quantities. The mistake people make here is they don’t check the past performance of the stock. Imagine a building with 25 floors, and a stock is in first floor. The common philosophy says buy the stock at first floor and sell it at 25th floor. Sounds good right ? So what’s wrong here ? The wrong is, people don’t check how the stock reached 1st floor. If the stock was initially at lower basement and moved to first floor then it’s a good sign. But imagine a stock reached 1st floor by falling from 10th floor. Now that’s a bad sign. In the first case the stock was moving higher and in the second the stock was falling. So if you had an option to pick a stock from the aforementioned two scenarios, which would you choose ? A stock that has the potential to reach higher or a stock that has a potential to go lower ? Well, sometimes the second option too could be chosen provided the intrinsic value still holds good. An example of this was stock prices during the pandemic. Many quality stocks were down by a huge percentage during the pandemic and some hit 52 week low. But as the intensity of the pandemic reduced the stocks soared again.
The second mistake to avoid is investing all your money in one go.
If you buy stocks when the market is at the crest and later if the market moves towards the trough, you’d be in a loss and you may call stock market as a gambling place. This even applies to day trading. Imagine you assumed a stock to go down but the stock went up and you made a loss of 20 paise. If the market has a potential to go further up then you may have to place the bet in the opposite direction to the previous one to minimise your loss or make profit. Imagine the stock moved up by another 20 paise and you had placed a bet in this direction, now you have minimised your loss. You made a loss of 20 paise in the first bet and in the second you made a profit of 20 paise. The P&L is zero. But imagine you had to make a profit with the same 20 paise move, how do you do it ? The answer is increase the quantity of stocks. If you made 20 paise loss on 1 quantity, the loss is 20 paise but if you made a profit of 20 paise on 2 quantities, the profit is 40 paise. The P&L now is 40 paise minus 20 paise, which happens to be a profit of 20 paise. Note, the aforementioned process is very very risky. Doing stuff like that in live market that’s oscillating needs extraordinary talent. We’ve drifted a lot, so putting it in simple terms don’t invest in one shot. If you are a day trader, you may require capital to place the bet in the other direction too. So don’t dump all your capital on one trade. Note, I haven’t taken brokerage, stamp duty etc. into account in the aforementioned examples.
The third mistake people do is to try to overcome the losses on the same day. This can be done but when you’ve made losses the way your instincts function would be different. So many end up making bigger losses as they take multiple trades within the day in order to overcome the loss.
The fourth mistake people make is sell the profit making stock too early. It has happened with me quite a lot and a stock called Redington moved over 100% after me selling the stock. Imagine you bought a stock for ₹100 and it hit ₹120 and you booked your profit. Now imagine that the same stock hit ₹150. Earlier you made a profit of ₹20 but now if you want to buy the same stock again you’ll have to shell ₹30 extra. Also some people sell profit making and dividend yielding shares and use the money to buy small cap, which is a blunder. I’ve personally done this mistake.
Well, those were the four mistakes most beginners make. I’ll be adding more to the list in the days to come. So if you haven’t subscribed to the blog yet, please do it at the earliest to receive posts in your inbox. Saying that I end this post. See you next time with a different one. Byeee 🙂