Investment Handicaps in Stock Market

 

In People all over the world, there is always handicap among the people regarding investments in Stock market in both ways i.e. either through direct investments in stocks or through mutual funds. In the article, we will discuss about the various handicaps, which people face while carrying out investments:-

1.       Lack of knowledge:

For investments in directly in stock market there is requirement of knowledge about stocks such as P/E ratio, Dividend yield, Profitability, Company businesses and order book of the company etc. They is also requirement of basic knowledge about how to read the balance sheet of the company, how the government policies and changing environment will affect the company. Without adequate information, they may fall into trap of quick moneymaking trades and they even buy some stocks on other pump and dump recommendation, which will result in to the losses.

So instead of individual picking of stocks which required lot of expertise and patience people can enter into stock market through mutual funds where funds are well managed by fund manager which have huge experience in managing portfolios of thousand crores. People should invest in to the mutual funds through SIP mode for better returns.

 

2.       Emotional biases:

Human investment decisions greatly impacted by emotional factors, fear and greed. Generally, when we buy a stock and if during course of holding the stock company fundamentals are deteriorated considerably due to corporate governance issues, changing government policies, Company profitability get impacted and keep on booking losses etc. we kept on holding the stocks even when 70% of valuation of stock are eroded.

As we have not a decision making power to exit the stock initially when you came to know about stock. This is fear and greed, which leads you to hold the stock hoping that it may recover within 2-3 years, which never happens.

We should have clear-cut goal in our mind about our holdings i.e. when to exit the stock both in profit or losses. Market never operate according to your emotions.

 

3.       Market volatility:

The stock market can be highly volatile, with prices fluctuating rapidly in response to various factors. Sudden market movements can make it challenging to predict short-term price changes accurately and can result in losses. So never, invest in market for shorter period, as you cannot ascertain the movement of stock market. Fundamental of stock market keep on changing over the period.

Stock market movement not only tracks the domestic triggers but also the international market fluctuations. “So never try to tame the market otherwise, market will tame you”.

People generally jump into the market for quick bucks but when they burn their hands in few months, they never look back to stock market. So do not become a Rabbit to finish up the race be a tortoise for completing and winning the race.

 

4.       Lack of diversification:

You have to diversify your investments up to maximum of 10 stocks. Under and over diversification are both harmful as under diversification will results into Concentrating investments in a single stock or industry increases the risk exposure to specific events or factors that can impact the performance of that investment. Diversification across different sectors and asset classes can help mitigate risks.

Over diversification will never give you the required returns as on a given period of time few stocks will rise and few will fall which will leads to balancing of your profit and loss and you will never get the required returns.

 

5.       Insider trading and market manipulation:

In stock market there are so many Illegal activities, such as insider trading or market manipulation, can disadvantage individual investors. These activities involve the use of non-public information or deceptive practices to gain an unfair advantage over other market participants. In this case, promoters of company do the insider trading i.e. buy or stocks according to the company upcoming events, which will leads to losses to the individual investors.

Promoters even some times manipulate their financial records for increasing the price of stock and when price increased to a certain level; they will sell their holding resulting into downfall of that particular stock. This will leads to fall in investor’s confidence level and people try to get away from these frauds.

 

 

6.       Transaction costs:

Frequent trading can result in significant transaction costs, such as brokerage fees and taxes. These costs can eat into investment returns, especially for short-term traders.

 

 

These are the above-mentioned handicaps in investments in stock market, which are leading the people not to invest in the stock market.