Many investors invest money on an instrument or share when it is at its peak or whose prices have just begun to come down. As a result, they end up losing a significant amount of money as they missed most of the upswing. There are many short term investors who make this mistake and suffer heavily. Investing in an instrument when its price has reached its peak is not a good investment strategy. Here are some more do’s and don’ts for new investors.
1. The story
Let us understand with a short story when investing must be avoided. A friend of mine, let’s call him Rahul, invested in stocks last year. He bought a few shares, each costing Rs. 300 when the price was declining. He thought that he would make good returns when the prices would start to rise. Soon the stock hit the Rs. 350 mark but he waited for it to rise further. That, however, did not happen and it instead fell to Rs. 150. He then bought some more of the stocks to average his cost of the stocks to Rs. 200. He, once again, waited for the prices to rise so that he could recover his losses. Five months have gone by, but the price of that stock is yet at Rs. 85. This is not just the case with Rahul, almost all starters commit this mistake.
Buying a share, when it has just started falling, is not a sensible choice and is bad timing for investors. Generally, stocks tend to continue their decline for a while once they begin falling. It is better to buy a stock when it has declined tremendously and has just started to suddenly climb. This way, you will stand to make better gains. Change of stock value can occur anytime but a sudden reversal is rare.
Ignoring the trend is not a smart move. You can take risks but you will have to deal with the losses. Selling the stocks with no gain, rather than when it is on a free fall, is much better than facing losses. Patience is the key. Also, setting loss endurance is very important when investing. Ask yourself, how much are you willing to risk and lose? This will help you determine a point of loss which you are comfortable with and sell the stocks before it is too late.
Stock price and its movement is more a science than magic. You need to learn the basics of reading stock valuation and the factors that influence it. Closely monitor these variables on a regular basis to find a suitable price and time to enter and exit stocks/markets. Several external factors also play a role in driving share prices, such as domestic and international economic and policy news. A sharp eye can see these developments and enter/exit at right moment. Ignoring fundamentals for exceptional gains is foolish; set your targets and follow them to avoid misfortunes.