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Mistakes direct equity investors make: How to avoid them?

ICICI Securities 10 Mins 24 Dec 2022

The rising stock market has attracted many investors to equity investment in recent years. Millions of accounts have been opened in the last two to three years. Most of these investors are new to the market - many from Tier 2 and 3 cities. They are betting big on the equity market. 

If you are new to investing or have spent time in the market but have not made significant gains - you may be making common mistakes that most direct equity investors make. Today, we will discuss common mistakes and how to avoid them.

What is direct equity?

Before we mention the mistakes, you must understand - direct equity. Equity is the shares of the company. You can buy the shares of listed companies via equity mutual funds or your stock broker directly. Direct equity means that you invest in the stock market directly.

Common mistakes to avoid while investing in direct equity

Below are some common mistakes:

Investing without any objective: Before investing a single penny in the direct equity market (or any other asset class), you must know why to invest. It is even more essential while making direct equity investment as it is one of the riskiest asset classes - things can change quickly. If you are unclear about your objectives and goals, you may sell your positions when the stock price falls slightly. To avoid making this mistake, you need to create a plan - your financial goals. As per your financial goals, you should pick stocks and sell them according to the plan - not randomly based on emotions.

Short-term view: Most investors have a short-term view for their direct equity investments. If the stock price rises by 10%, they sell it, relishing the small gains they made in a short period. If the investment goes down, they sell it to avoid losing more. The truth is that even the best shares can go through a lean patch and may not rise for a while. If you have invested in the right stocks, you must stay invested if the fundamentals continue to remain the same.

Fail to diversify portfolio: Most investors fail to diversify and create a portfolio with one kind of stock. For example, a rally comes in the IT sector. They will pick only IT stocks and will be happy with overall portfolio gains. However, that is not the right way to create a portfolio. Also, if you are new to investing, you may end up with only small-cap stocks in your portfolio, as you want to make quick money, and small-cap stocks have the potential. Check your portfolio and find out if your equity portfolio is diversified - it has stocks from different sectors and market caps. If not, start working on it.

Hold on to the losers and sell the winners: One of the biggest problems (which is also an advantage) with direct equity is that one can sell it with the click of a button. Investors sell the performing stocks (winners) quite early, while they hold on to the losers for a long time. You can avoid this mistake by reviewing your portfolio regularly. If the fundamentals of any company have changed, you can sell them. If the price has fallen because of some event, you need not do anything.

Limited exposure to equity even after years of investment: Many investors plan to retire early. One way you can retire with the required corpus and sooner is by investing in direct equity. However, most investors keep limited exposure to equity for a long time. They have a substantial amount in fixed deposits and debt funds. Most investors are invested in direct equity only for the namesake. If you are making the same mistake, it is vital to get your allocation right. Once you have a plan, you will know how much equity allocation you need.  

Should you invest in direct equity?

Direct equity is not everyone's cup of tea. The first thing you need to determine is whether you are one of those who are comfortable investing in direct equity. Every investor thinks that he can make money by investing in the market. However, the harsh reality is that only a small percentage makes good gains in the market.

Investors with a high appetite for risk should invest in direct equity. If you are a conservative investor, you must avoid doing it on your own, unless you have the required expertise to lower the risk (a risk management system).

Direct equity needs your time and effort. If you are ready to give time to the market, invest in direct equity without a second thought. It has the potential to deliver high returns and help you achieve all your realistic financial goals.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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