Avoid these common stock investing mistakes !!

Common Stock investing mistakes to be avoided

1. Borrowing money to invest in stocks or leveraging When you borrow money to buy stocks it is called leveraging. Many investors in over confidence about their convictions about stock market borrow money to invest and they are the ones who suffer the consequences. Margin money is the amount an investor pays to a broker to have a larger position than the money that has been deposited. The interest rate on such lending is higher. When the stock prices are rising and stock markets are rallying the return on such investment is much more than the interest cost. On the other hand when the market falls, there is a complete wipe out of investor’s money. For example if a stock 250, you bought stocks worth Rs 40,000 on an initial capital of Rs 10,000. If the stock moves to Rs 270, it has gone up by only 8 per cent, but the return on investment is 32 per cent. Now if the stock dips to Rs 200 down 25 per cent, you stand to lose 100 per cent, add to this the interest cost to the total capital loss, then the initial capital is completely wiped out. So, Avoid leveraging or borrowing funds to invest in the stock market it can spell disaster for your financial well being. 2. Averaging the cost Whenever the price of a stock starts falling, the initial reaction from investors is to buy more to average out the cost to lower levels. Although it might bring down the total average purchase price of the stock, a lot of money has gone into this process. It is almost like throwing good money after bad money. Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time. Do not get emotionally attached to a stock as it can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low. 3. Do not investing on tips or rumors Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks. There are hundreds of examples where tips are given for penny stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal. You should invest some of your time researching the stock you want to buy. Most of the information is available on the net. 4. Derivatives (Futures and Options) Devil New investor should stay away from the derivatives market. According to Warrant Buffet “derivatives are 'financial weapons of mass destruction”. A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium. But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favor them. No wonder, losses keep mounting and can really hurt sometimes. Derivatives are not an investment tool but a hedging mechanism. So either don’t use it or use only after you have learnt about derivates. 5. Investing in IPO (Initial public issue) When the stock markets are booming the initial public offerings (IPOs) of companies is oversubscribed by 40-50 times. On listing at the stock exchanges usually the stock lists at a premium and investors make some money by selling it. If the IPO lists at a lower price you can be stuck with a dud stock. During a bear market phase like the present one even those IPO’s which listed at a premium tend to go below their issue price and investors lose money. Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment. Invest in IPOs only when you believe in the company. Otherwise, just stay away. HAPPY INVESTING !!