Top 13 Common Mistakes to Avoid While Investing in Stocks.

Updated: Nov 18, 2019

1. ‘Buying Right stocks at the wrong time’.

For example, You are interested to buy BPCL right now because you think that it's undervalued stock (Trading 10 times of its FY18 earnings, Company is delivering profits every quarter, ROCE: 21.76 %, ROE: 24.61 %, Debt to equity: 0.67, Pledged percentage: 0.00 %, etc) and everything looks perfect. But you are ignoring the fact that Brent crude surged more than 40% in last 3 months and Stock is bearish on the chart as well (18 out of 28 indicators are showing bearish signal). So BPCL is a good stock to invest but this is not the right time to get in.

2. Waiting for the right time to enter.

The best thing about the market is it will always give you the opportunity to invest your money irrespective of the overall valuation of the market. (In the current scenario Pharma and Cement stocks are on the fresh breakout. Every time you will find, one or another sector would be on the fresh breakout)

3. Not performing Technical analysis before buying the stocks.

Fundamental analysis talks about ‘What to Buy’ and Technical Analysis talks about ‘When to buy’. So it is always important to know What to buy and When. So charts play a very important role for a better investment. Take the above example of BPCL only. Let’s see the charts. In my analysis, I have taken 6 indicators simultaneously and all of them are shouting “It is not a good time to buy BPCL”. You can learn Technical Analysis in detail here

4. Using high brokerage Demat account.

The only question is Why to use a high brokerage demat account if some of the good brokers are offering Zero Brokerage?

I personally use Upstox because they charge 0 brokerages for all delivery trades. You can open your free demat account here

Upstox features:

1. 0 Brokerage charges for all delivery trades (No hidden charges)

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3. Trade in Stock, F&O, Currencies & commodities.

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6. 20X margins on Equity trades. 4X margins on Futures & Currencies. 1.33X margins on buying Options.

7. Place Buy/Sell orders & see order/position books directly from charts. 100+indicators to help you analyze the markets!

8. Interactive web interface and easy to use free mobile app.

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10. Advanced Options strategies Profit from advanced options strategies including Straddle, Strangle, Butterfly. Place orders using options strategies directly from Pro trading platforms.

5. Preferring low price stock over high price stock.

Stocks like ICRA, WABCO India, Monsanto India Limited, GlaxoSmithKline Consumer Healthcare Ltd, MRF are some of the most fundamentally strong stock then one can buy for long term so, price doesn’t matter but values do.

6. Lack of diversification (All eggs in one bucket.)

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event. Your stock portfolio must contain stocks from different sectors or maybe the combination of LargeCaps, midcaps and Smallcaps.

7. ‘Highly Profitable company is not always fundamentally Strong’.

What are the criteria for a stock to be ‘Fundamentally Strong’?

. The company should be consistently profitable.

. P/E ratio must be less than Industry P/E.

. The pledged proportion should be close to 0.

. Higher ROA, ROE, ROCE, PEG etc.

. Less debt

. Free cash flow should be positive.

. Interest Coverage Ratio should be more than 2.

. The current ratio should be more than 2

. Quick ratio should be more than 2.

. Debt/Equity should be less than .5

. Intrinsic Value should be higher than the market price ( for value stocks).

. NPM must be higher as compared to industry NPM.

. Contingent liabilities should be as less as possible.

. Promoter’ stake should be higher.

So if the company is only profitable but not fulfilling these criteria then you can’t call the stock as Fundamentally Strong.

8. Trading with borrowed funds ( or using margins).

You borrowed the money at 5% interest and you are generating 10% then that’s fine but what is the guarantee that you will earn 10% every time? Because if it doesn’t happen then your losses would be much higher. On the other side Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally. To trade on margin, you need a margin account. This time you also have to pay the interest. So better not to trade on margin as well.

9. Invest with other’s suggestions (Like News channel).

Better not to comment!!!!

10. Trading in Options/Futures without proper knowledge.

Equity options have emerged as a big segment of stock markets in the last 10 years. In fact, today index options and equity options put together account for over 85% of the total volumes on the NSE on a daily basis. The regulator has been trying to constantly caution retail investors about the merits and demerits of the F&O market. For profitable trades, try to learn numerous strategies first and then start trading. You can learn Options Strategies here

11. Not conducting exhaustive research

Along with fundamental analysis check for the best time to enter. ‘Entry point’ and ‘Exit point’ should be pre-decided. No matter how many times it is breaking your exit point but in order to make money in the stock market, you must be a disciplined Investor/Trader. Cutting your losses has always been the best strategy one must focus on. You can use 100 EMA or 200 EMA to decide when to enter and exit but once you have decided, stick to it.

12. Acting with emotions.

How investors missed making big profits

1. Indigo delivered bad quarter numbers the Quarter result fell 97% QoQ and investors rushed to sell the stock at the levels of 700 Rs. Stock is now trading at 1400 levels.

2. When Maggi was banned in India then investors lost the hope and rushed to sell the stock at 6000 levels, Stock is now trading at 11,000 levels.

3. After a long investigation, no one found anything wrong with PC jewelers and the stock fell down to 70 levels. The Stock recently touched 145 levels.

4. Without any relevant reason, Dilip Buildcon witnessed the sharp sell-off and fell down to 300 levels, The stock is now trading at 600 levels.

5. When Sikka left Infosys, we witnessed a sharp selloff and the stock fell down to 700 levels. Those who used their minds are still holding the stock at 1400 levels (with 1:1 bonus in July, the stock is trading at 700 levels now).

I have lots of more such examples. So, If you can control your emotions, you can win. When the stock price falls, many investors feel akin to terror. And what if it’s the beginning of a downward trend in the market, which will lead to large losses? And then there is the temptation to sell the shares in time to minimize their losses. Novice investors often sell their shares even after a slight drop in their prices, and the next day discovers that the market played yesterday’s losses. These are professional players and fraudsters, who make good on this. The most experienced may even manipulate the markets specifically spreading good or bad news.

13. Ignoring the Microeconomic data

Not just fundamental and technical analysis but Microeconomic data plays a vital role which examining the market conditions. Those data are IIP Data, PMI data, Repo rate, CPI data, etc.

Suggestion: Before investing in the stock market, invest the same money in your knowledge as an investment knowledge pays the best interest, for a lifetime.


Akshay Seth | Linkedin (Connect here) Get daily stock recommendations here Learn Stock Fundamental and Technical analysis here

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