A complete article on “stock selection mistakes by beginners” – Making mistakes while making investments is very common and happens quite majorly with many of us. At the same time, if you are a beginner in basics or investing then you gonna lose a lot.
But do you know Zerodha’s founder Mr. Nithin Kamath has said that less than 1% of the active traders beat bank FD rates in trading? I hope you heard the news. 99% of people are not even crossing bank FD rates and that’s too obvious in trading.
Even investors make blender mistakes while investing in stocks without seeing what the company is all about and are the current pricing justifiable.
So, there are a ton of points to be considered before investing in any stock. But let us see what significant mistakes beginners commit while investing in stocks and how to correct those
Buying using the price of a stock
Most beginners prefer to buy penny stocks, which have a double digital price and are available below 100 rupees. The main intention behind this interest is with low prices they can get more shares assuming increased returns.
Let’s take an example.
Suppose let’s consider X and Y two publicly traded companies having share prices of 10 rupees and 500 respectively.
I’m sure that a beginner with 1000 rupees in his pocket would buy X company’s share if he was confused about which stock would yield more returns. Essentially, he is choosing between getting 100 shares from X company or 2 shares from Y company.
If X can make a return of 5% then he can make 100 rupees profit otherwise if he chooses 50 rupees and Y can make 50 rupees the same as well.
Here the number of shares changes the decision of buying out shares even without looking at the company size.
How to overcome
It is always a bad idea to compare one company’s stock price with another company’s stock price. It is quite obvious from looking at the low-priced stocks and their returns that it appears to be an interesting investment. However, the risk is too high that once everyone decides to dump their shares, there won’t be anyone to back your order.
Without checking the fundamentals
I have seen most people buy stocks from the advice taken from their friends or follow any news channel by seeing their stock recommendations. And numerous times they will money knowingly or unknowingly.
Think this way, if you visit a mobile store for purchasing a mobile. Its crystal clear that you will ask countless questions like
- What is the RAM?
- What is the ROM?
- What is the camera quality?
- What is the screen size?
and many more. Just the same why don’t you ask some questions to yourself before investing in stocks instead of following others’ recommendations and later regretting it?
But what are the significant questions you need to get
- What is the P/E of the company?
- What is the book value?
- What is the daily volume of the share?
- Is the company reporting growth on Qatar on Qatar and year on year
- Dividend yield?
How to overcome
Fundamentals are the key essential metrics in the stock market that decides the stock’s valuation and risk ratio. See all the companies listed on the stock exchange are not completely reliable or healthy in their business. Every business has a competitor and both competitors may list on the stock exchange individually
If we take an example, Infosys and TCS belong to the same category of IT services but both of them are highly profitable because of their individual leadership and demand there in the market.
We need to figureout a sector that has a lot of scope to do and main players bt looking at their balance sheet.
Not understanding the business model
A business model is a very backbreaking and unavoidable task for a beginner. There is no single more powerful fundamental in the stock market than the business model and grasping the knowledge of understanding is a very difficult task. Nevertheless, most beginners fail to master it because they lack guidance to gain.
A business model is nothing but selling products in a way that other company fails to do in a profitable way. The company size symbolizes the market position of that particular company and its expansion.
Sustainable businesses will sustain until the end consumer uses with choosing an alternative.
Think about some companies like Colgate, ITC, Reliance, and HDFC bank products and services
ITC was formed in 1910 but its still growing every year with its new and existential customers
As you know every company has a unique business model and projection of growth. A pharma company will not indulge in an IT sector company and vice versa. It’s our responsibility to know what is the company doing and whether is it relevant today by having a significant proportion of consumption in the market.
Stock selection mistakes for beginners are frequent but can overcome within less period of time by following the below approach
Let’s take an example
Maruti Suzuki has a market share of 46.4% in India’s passenger vehicle segment according to ET now
So replacing Maruti Suzuki with another brand is most likely an unattainable thing least for a decade. So, Martui has a clear monopoly here in doing business in the automobile segment.
Likewise, we can find numerous companies ranked top in their sector like Unilever in consumer goods, HDFC in banking, and TCS in IT.
How to overcome
Identifying a company is simple and easy because the daily products use like tooth paste in the morning, breakfast like flakes, biscuits, soaps you use every time you a bath, bike or car you use for transportation, etc…
Look the history of the company you would like to prefer and its core competitors in its segment. If the company stands out of its competitors then take a look at its growth by quator on quator and year on year. Healthy companies will always attract its share holders by offering benefits dividends and buy backs.
These are the stock selection mistakes by beginners and their soultions