Took a look at the stock markets in the last few months? Raging bulls were all over the place. After demonetization many shares hit their 52 week highs. Then the IPO's... If you invested in the IPO's (Initial Public Offers) of CDSL, Avenue Supermarts Ltd, Shankara Building Products or Salasar Techno Engineering and were lucky to get the allotment, you would have seen more than 100% returns on your investment and that too, in a few weeks.
Cut to the last few weeks. The stock markets have been crashing. The Indian economy is going through a minor bump. North Korea has been launching missiles and is threatening Japan with nuclear destruction. Then the Indian army surgical strikes against Naga insurgents along the India-Myanmar border...All of this resulted in the stock markets falling in the last few weeks.
Now to the big question, What are the mistakes to avoid in a falling stock market? Want to know more on investment planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
4 Mistakes To Avoid In A Falling Stock Market
Everyone loves a rising stock market. When bulls are running, nobody complains. The problem....When bears come out or the stock market crashes. This is when you need to be at your best. It surely doesn't hurt learning the 4 mistakes to avoid in a falling stock market.
1. You buy more shares to bring down your average
Nobody's perfect. We all make mistakes when buying shares. You might have bought a share at a very high price. You might have bought shares whose fundamentals are not sound. The trick is not to repeat or compound these mistakes.
Averaging or buying more of the shares of the Company you hold at a lower price to bring down the average buying price is a very good idea, provided the fundamentals of the shares are good and the share prices are falling due to external factors or temporary events. Otherwise, you could be buying a lot of junk. If you buy more of the shares you own at a lower price (averaging down), just because their prices have fallen, you could be catching a falling knife.
If you average down shares whose fundamentals have deteriorated, you could suffer heavy losses.
You have bought stocks hoping their price will go up. You then start reading news and research reports which would confirm your belief in these stocks. If you come across any news or report that confirms your beliefs in these stocks, you are very happy.
You may read a detailed research report which gives you both, the positives and negatives of the stocks you hold. But, you are a victim of confirmation bias. You concentrate only on the positive news/research of the stocks and not on the negative information. Emotions cloud your judgment.
See Also: Stock Exchanges In India
Never close your mind to negative information on the stocks you hold.
3. You borrow and invest in stocks
Your stock broker might encourage you to borrow and invest. He might encourage you to try margin investing (borrowing money from a broker and buying stocks).
This is just like a loan from your broker. If you are borrowing from your broker and buying stocks, you need to get at least the rate of interest, you are paying on the borrowed money.
If you borrow and invest in stocks, you cannot afford to lose. This limits your investment options.
SEE ALSO: How to invest in stocks?
Systematic investment plan also known as SIP, is a method of investing in mutual funds. You invest a certain pre-determined amount, (amount you have decided beforehand), at regular intervals of time, in the mutual fund. This might be once each week, once each month or once in a quarter.
This is when you commit a big mistake. You stop your SIP's in a falling market. The very purpose of the SIP is lost. If you have just started investing in mutual funds through SIP's, make sure you continue your SIP's in a falling market and do not get swayed by emotions.
A falling market is the best time to stick to your SIP's which would help you achieve long term financial goals.
A falling market is the best time to test your metal. It's the time to buy or accumulate good stocks at low prices. If you make foolish mistakes, you could lose this splendid opportunity. So avoid these 4 mistakes in a falling stock market and make wise decisions. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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