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Most common mistakes of share market

Everyone starts investing in share market to earn profit but most of them end up with losing their money. Share market is a game of intelligence and risk. If a person is not able to measure the risk factor or not willing to take the risk then there is no place for that person in share market.

In this article I am going to point out two big mistakes repeatedly done by investors while investing in share market. These two mistakes often result in loss of money and hope.

Investing a large portion of money in single stock:

This is one of the biggest mistakes of share market, Investors do on daily basis. Here I would like to focus on why this is done even by investors who have enough knowledge of share market?

The answer is quick return. In expectation of quick return we do this mistake and ends in wasting a lot of our money.Share market is game of patient people. People who waits for the right time to take action. For example: John has been investing in share market from last two years. In this time he has not earned any profit but he is tracking some stocks from last couple of months. These stocks are seeming quite stable to him. Now one day he finds that stock of ABC Ltd, which he is tracking is rising unexpectedly.For John it’s time to earn some profit as the time has come when one of the stock he is considering stable, is rising everyday. He waits for some time to make sure that rise is not temporary. John now takes the risk and invest 2/3 of his total investment in that stock by considering that:

It’s a stable stock (As he was tracking the same)

To earn in share market, risk has to be taken.

He has knowledge of share market (As he is playing this game from last couple of years).

John found that the price of stock has fallen for the day. But he just keep taking risk as this is the common scenario that the price goes up and down. Also he was not able to sell those share as it would have result in loss of money. But John is now facing the situation where he cannot sell the stock and stock price is going down everyday.

Impatient:

This is the second mistake comes in to picture when someone focuses his mind on earning profit quickly. Impatient here refers to by/ Sell in hurry and without doing much basic analysis.

This mistake is too common for new investors, who thinks they know a lot of share market. To earn profit quickly they just invest in stocks whose price is going up irrespective of the risk associated with these stocks.

Impatient may occur in these two situations:

When stock’s market price is more than the purchasing price:

This situation prevents an investor to make more money as the rise in price is not temporarily.

When stock’s price is lesser than the purchasing price:

This situation sometimes gives mental satisfaction (as investor has been holding the loss from last few time and now ready to accept it) but always results in monetary loss.

BSE Sensex – Meaning and Constituents

Meaning of BSE Sensex:

Introduced in 1986, BSE Sensex is one of the prominent stock market indexes in India. Sensex is the sensitivity index of Bombay stock exchange. It composed of 30 companies that belong to 11 various industries. These are the well established, reputed and highly traded companies in India.

Constituents of BSE Sensex:

The below table lists all the companies which constitute Sensex:

BSE Sensex’s Constituents

AXIS BANK LTD.	HINDALCO INDUSTRIES LTD.	NTPC LTD.
BAJAJ AUTO LTD.	HINDUSTAN UNILEVER LTD.	OIL AND NATURAL GAS CORPORATION LTD.
BHARAT HEAVY ELECTRICALS LTD.	HOUSING DEVELOPMENT FINANCE CORP.LTD.	RELIANCE INDUSTRIES LTD.
BHARTI AIRTEL LTD.	ICICI BANK LTD.	STATE BANK OF INDIA
CIPLA LTD.	INFOSYS LTD.	SUN PHARMACEUTICAL INDUSTRIES LTD.
COAL INDIA LTD.	ITC LTD.	TATA CONSULTANCY SERVICES LTD.
DR.REDDY’S LABORATORIES LTD.	LARSEN & TOUBRO LTD.	TATA MOTORS LTD.
GAIL (INDIA) LTD.	LUPIN LTD.	TATA STEEL LTD.
HDFC BANK LTD.	MAHINDRA & MAHINDRA LTD.	Vedanta LTD.
HERO MOTOCORP LTD.	MARUTI SUZUKI INDIA LTD.	WIPRO LTD.

Note: Companies are listed in alphabetical order and not on the basis of their market capitalization.

Where do we find stocks to invest in?

I have been asked by a lot of new investors that how to find companies in which they should invest. The same question was in mind when I first started to invest in share market. But, as I spent some time investing in this market, I come to know a lot of sources which are useful to choose a company in which investment can be made.

So, in this article I am gonna deal with the question:

Where do we find stocks to invest in?

Below is the list of sources which are useful for finding a new company of investor’s interest.

BSE’s (Bombay stock exchange) website:

I started finding a new company from the database of BSE’s website.

But there are a lot of companies added in this list so which company should one choose?

BSE lists both loser as well as the gainer for the day. The best answer to our question can be found here.

I frequently check the list of loser companies (companies whose stock prices are decreasing).

It gives me a hint for choosing and analysing a company which might be worth investing in.

Often I also check for companies which are top gainer for the day.

Then I thoroughly analyse same company to find out the reason. Here you must aware that based only on increasing price for the day, you cannot select a company.

Market news:

Market news is the second source which I trust on. I frequently check for such a company which is in news for some reason. The reason might be unfavourable condition (prevent me to invest in such a company) or good news for the company (may be considered for investing).

At the time of writing this article I found ITC stock price plunged 8.27% in a single day. It was because of some announcement in budget. So, it gave me a clear reason not to invest in ITC stock for some coming days.

Expert views:

Expert of share market also spread their thoughts time to time. All you need to do is to find out such views. These views are useful as they are based on some logical calculations.

Broker’s advice:

You may consider the advice of your broker as you are paying him for the same. But you should not trust these brokers every time and should make an analysis by yourself about the company they are telling you to invest in.

Consultant:

Now a day many consulting firms are also engaged in doing the same job for you for a fee. These consulting firms update you time to time and suggest you the list of companies which they think are going to increase in their values.

Final words:

All these sources are just a way to find out a company which you may consider for investing. But it won’t be wise for you to invest in these companies without doing a thorough analysis based on some basic criteria.

If you want to start investing in share market then you must be aware of analysing a company based on some basic techniques. It’s your money which is going to be invest so be careful and confident before investing it in a company.

How is Sensex calculated?

Many of us want to know that how is Sensex calculated? This article is written for the purpose of answering the same question.

Earlier Sensex was calculated based on full market capitalization. But since September 1, 2003 this index has been calculating on the basis of free float market capitalization methodology.

The term ‘free float market capitalization’ refers to that proportion of total shares which are available for trading in stock market. It means that out of total no. of issued shares, if promoters’ holdings, government holdings and other locked in shares are excluded then remaining shares represent free float market capitalization. So if put it simply, free float market capitalization is the proportion of total shares available for trading to the general public.

Process of calculating Sensex:

Step 1: Determination of total market capitalization: The Sensex comprises of 30 stocks which are listed on BSE and represents various sectors of Indian economy. The very first step in the calculation of Sensex is the determination of total market capitalization of these 30 companies. For this purpose, market capitalization of each company is calculated and then added up to reach total market capitalization of Sensex constituents.

Market capitalization of an individual company is calculated by using the given formula:

Market capitalization = Total no. of issued shares × market value of each share.

Step 2: Calculation of free float market capitalization: The second step in the calculation of Sensex is the determination of free float market capitalization. This is done by multiplying the free float factor by the total market capitalization of that company. This free float factor can be taken from BSE website. The free float factor tells that how much shares of a company is available for trading to the general public. If free float market factor of a company is 0.65 then it means that only 65% of total shares are available for trading to the general public.

Step 3: Establishing a link to the base period: This is the most important step in calculation of Sensex. The only thing that links the current Sensex price and the Sensex price at the time of base period, is this step. In this step the free float market capitalization of the index constituents is divided by a number known as the index divisor.

Index divisor is an arbitrary no. which is used in the calculation of an index. This number is calculated by dividing the base year’s index value by base period’s market capitalization of the concerned stock market.

Example: How is Sensex calculated?

Let’s suppose that the Sensex is consisting of only 3 stocks i.e. X, Y and Z. The given table shows that how Sensex is calculated:

Step 1
	Total stock	Market price of each stock	Market capitalization
X	1,00,000	40	40,00,000
Y	90,000	55	49,50,000
Z	1,35,000	32	43,20,000
Total market capitalization			1,32,70,000

Step 2
	Market capitalization	Free float factor
X	40,00,000	0.75	30,00,000
Y	49,50,000	0.85	42,07,500
Z	43,20,000	0.70	30,24,000
Total free float market capitalization			102,31,500

Base year	1978 – 79
Base Index	100

	1978 – 79	Current value
Market capitalization on	60,000*	102,31,500

*Assumed value for calculation

Step 3
Sensex	10231500 × (100/ 60,000)	17052.5

How to get maximum return from your portfolio?

Your portfolio is like a garden, which you have to maintain on daily or weekly basis. If you don’t take care of your garden, you will find it a place with dry grass, unwanted plants and a house for bugs. Your portfolio is also vulnerable to bugs, these bugs are not any insects but these are the market bugs like loss.

The idea behind writing this article is to give the answer of the question:

How to get maximum return from your portfolio?

There are several methods given by experts to maintain one’s portfolio to generate more profits. This article does not deal with these methods, so if you are hoping for any specific method, it’s time to shift to another source.

The main purpose of this article is to discuss some basic things which can be applied in managing and maintaining portfolio and thus increasing one’s chances of getting higher profit.

Quick readings:

Allocate your total investment amount in various securities like stocks, derivatives, currency, commodity etc.

Disperse your fund (which you have decided to invest in a particular security) into different industries.

Purchase securities of different companies in a particular industry.

The very basic thing one needs to do for increasing his chances of getting higher return is to allocate his/ her funds to different types of securities like stocks, derivatives, commodity etc. This is the most important task for hedging risk.

Let’s suppose If John has only one type of security in his portfolio, chances are that his portfolio would not survive in adverse market situations. But on the other hand if he possesses different types of security in his portfolio, his chances of surviving in adverse market conditions will be higher.

Reasons, why price of a security falls down?

Stock prices can go down by as many reasons as you can think. Some of them are, due to:

Global crisis
Natural/ man – made disaster
Change in government policies etc.

So, if you want to hedge these types of risk and want to earn profit, the best solution is, diverse your investment in various securities.

Secondly, just allocation of investment in different securities is not sufficient in itself for balancing risk. That is why an investor needs to spread his/ her investment in securities which belong to different industry also.

Like if John has decided to invest 30% of his total investment in stocks. It’s good for him, to spread this amount among various industries’ stocks.

Finally, it is suggested to investors, that they need to further disperse their investment amount in different organisation’s securities and do not take the risk of investing in only one or two company’s securities.

Investment in different securities has its own merits like if one company’s stock is not going up; it won’t affect the portfolio as much as it could (in case of one has purchased a large no. of shares of that company).

Investment in different securities also leads to increase in the value of overall portfolio. It is because if one security or company is not performing well, the other will.

Why should we follow these above steps?

You can better understand the value of these steps by reading this hypothetical story:

Once, a friend of John suggests him to invest some money in share market. After discussing with his other friends and family members, John decides to invest in share market for the purpose of increasing his investment for his new business plan. He gets his demat account opened through a stock broker and starts trading in share market. After some time, John finds XYZ Ltd company’s stock very lucrative as he gained a profit equal to 5% of his total investment from that company’s stock, in just 2 days. He decides to purchase a larger no. of shares this time and now he has only one type of security in his portfolio i.e. shares of XYZ Ltd. John has been earning steady profit in share market as the share price of that company were rising day by day. It was a good time for him as he discarded the very basic principle of investing- “Don’t put all of your eggs in one basket”, and still earning money. Now what happens, one day XYZ Ltd has to face labour strike and as a result it’s production halts for some time. The company suffers a huge loss and investors start pulling their money out, from that company.

John also tries to pull his money back but due to high supply of shares, the stock breached its lower circuit and stopped trading for that day. The very next day John just waits for the time when market gets opened. As his waiting time overs, the stock opens directly at lower circuit and John has to wait for the next day. This happens for 4 to 5 days and in the meantime John sinks all of his earned profit as the share price falls down by 20 – 25 per cent.

John regrets a lot and then decided not to repeat this mistake again.

Personal view:

I personally have seen people who had been earning profit for last few months and lost all of their profit plus a large portion of their investment in a single lot, just like John. It happens all the times. The common thing among all of them was, they were targeting very few companies as their investment option.

Disclaimer: MonetarySection.com will not be any way responsible for trading losses incurred using any of the techniques/ methods mentioned on this website