Trading in stock markets is for everyone. However, just like any other investment vehicle, stock markets have their common dos and don’ts. Those who look at this as a formula to make a quick buck, often have a tough time.
Here are some key reasons why some people lose money in stock markets while others leap ahead.
1. Lack of Knowledge
Believing in rumors and acting on ‘trading tips’ received from unauthenticated sources can be dangerous. To trade profitably, you need to know the real potential of the company you plan to invest in, the key trends affecting that stock, and the micro and macroeconomic outlook for that sector. Always follow research reports and market analysis presented by credible sources.
2. Treating Stock Market like a Casino
The stock markets don’t really follow the ‘high risk, high return’ philosophy. Investing without fully understanding the implications of the risk is as good as gambling. Earning real gains means leveraging reliable market knowledge and taking calculated risks.
3. Being Impatient
Staying calm and analyzing your portfolio when the market is crashing is always better than making a hasty decision or following the herd. Being patient allows you to know the implications and make a strategic investment plan.
4. Not Investing in Blue Chip Stocks
Blue chip companies like SBI, TCS, etc. have diversified interests, proven business models and robust management practices. Their risks are generally spread across business lines, brands, product lines and geographies. Investing in such a scrip, for a long-term, is a sound strategy which may help you earn some good returns out of your investments.
5. Uncontrolled Diversification
While diversifying your stock portfolio is advantageous, over doing it increases your risk. According to Modern Portfolio Theory the benefits of portfolio diversification reduces when it has more than 20 securities.
6. Lack of Discipline
Following a systematic investment plan helps you set your goals and determine your financial flexibility. Once you achieve the predetermined returns, book your profits, and don’t be greedy! This also holds true in case of restructuring your investments.
While the above points are critical, consulting a financial advisor is always a great option. With their professional insights, they can put together a robust portfolio and suggest a well-thought trading plan that helps you make the most of your investments.