5 investing mistakes to avoid in 2009

For many investors, 2008 was a nightmare that came true. After four years of boom, when the tables turned, it wiped out lakhs of crores (trillions) of investors' wealth.
Last December, there would have been a smile on everyone's face. While the United States had started feeling the pinch of the sub prime crisis, many experts claimed that India was decoupled from what was happening there. Well, it took just one month to change the scenario.
On January 21, in a matter of hours the benchmark indices, Sensex and Nifty, hit the lower circuits. And in the next 11 months, there have been few moments of pleasure for the stock market investor.
Both the indices are down over 50 per cent. But depending on portfolio, some investors have even lost 80-85 per cent.
As the year-end approaches, let's look at some of the mistakes that many investors made during the last year and hopefully, refrain from making them again.
1. Over-leveraging
Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.
Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.
When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.
For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.
Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.
Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.
2. Averaging effect
Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.
However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.
Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.
Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.
3. Investing on tips or rumours
Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.
There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.
Lesson: Just ignore.
4. Derivatives play
For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.
A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.
But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.
No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.
Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.
5. IPO investment
On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.
That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.
But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.
Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.
Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.
Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.
Source

Shaky markets? Dos and Don'ts for you!

With global markets, and especially the Indian stock market, at their most volatile, many market watches are making all sorts of doomsday scenarios.
When the BSE Sensex was at the stratospheric 21,000 levels in January 2008, everyone and their uncle wanted to buy stocks, come what may.
Now that the Sensex has fallen to 10,500 levels, the exuberance that had visited the markets then is visibly missing.
However, in the process many a small investor lost tons of money. While the big players could ride the storm and perhaps get out with some hurt, many small investors lost their life's savings when the markets crashed.
So what should investors do now? Well, here's a basic check list for you to follow.
Dos and Don'ts of investing in stocks
· With the markets crashing, it is natural for you to be unnerved, but panicking will not help. Actually it's a once-in-a-lifetime opportunity to buy good stocks with strong fundamentals, but be very careful while doing so.
· Don't indulge in panic selling. Stay invested, it is time to buy stocks and not sell. Since very few people can predict market movement, NEVER try to time the market.
· To be on the safe side, invest in mutual funds, and don't listen to 'experts' who mushroom all of a sudden and are eager to give you formidable advice. If you are unsure about your research and is not too comfortable with your own judgement, MFs are your best bet.
However, there is a golden rule that applies to all and sundry. Regardless of what market experts tell you, it is critical to understand where you stand and where you want to be. Also, what level and amount of investment are you comfortable with. Therefore, take some time to evaluate your risk-bearing capacity.
· Now that you have decided to enter the market, maybe for the first time, do follow the following rules. It is imperative that you are aware of the traps and dangers of investing in stocks and exercise maximum caution.
What to do in the market
· Always deal with the market intermediaries registered with the Securities and Exchange Board of India (Sebi) / stock exchanges. Complete all the required formalities of opening an account properly (client registration, client agreement forms, et cetera).
· Always insist on contract notes from your broker. In case of doubt of the transactions, verify the genuineness of the same on the exchange Web site (http://www.bseindia.com / http://www.nseindia.com).
· Ask for and sign 'Know Your Client Agreement.'
· Read and properly understand the risks associated with investing in securities/derivatives before undertaking transactions.
· Assess the risk-return profile of the investment as well as the liquidity and safety aspects before making your investment decision.
· Ask all relevant questions and clear your doubts with your broker before transacting.
Invest, based on sound reasoning after taking into account all publicly available information and on fundamentals.
· Give clear and unambiguous instructions to your broker / agent / depository participant.
· Be vigilant in your transactions. Insist on a contract note for your transaction.
· Scrutinise minutely both the transaction and the holding statements that you receive from your Depository Participant.
· Keep copies of all your investment documentation.
Handle Delivery Instruction Slips (DIS) Book issued by DPs carefully. Insist that the DIS number are pre-printed and your account number (Client ID) is pre-stamped.
· In case you are not transacting frequently make use of the freezing facilities provided for your Demat Account.
· Always settle the dues through the normal banking channels with the market intermediaries.
· Before placing an order with the market intermediaries please check about the credentials of the companies, its management, its fundamentals and recent announcements made by them and various other disclosures made under various regulations. The sources of information are the websites of exchanges and companies, databases of data vendor, business magazines, et cetera.
· Deliver the shares in case of sale or pay the money in case of purchase within the time prescribed.
· Participate and vote in general meetings either personally or through proxy.
· Be aware of your rights and responsibilities.
· In case of complaints approach the right authorities for redressal in a timely manner.
Adopt trading / investment strategies commensurate with your risk-bearing capacity as all investments carry risk, the degree of which varies according to the investment strategy adopted.
· Please carry out due diligence before registering as client with any Intermediary. Further, investors are requested to carefully read and understand the contents stated in the Risk Disclosure Document, which forms part of investor registration requirement for dealing through brokers in the stock market.
· Be cautious about stocks, which show a sudden spurt in price or trading activity, especially low price stocks.
· Please be informed that there are no guaranteed returns on investment in stock markets
What NOT to do while investing in stocks
· Don't deal with unregistered intermediaries.
· Don't fall prey to promises of unrealistic returns.
· Don't invest on the basis of hearsay and rumours; verify before investment.
· Don't forget to take note of risks involved in the investment.
· Don't be misled by rumours circulating in the market.
· Don't be influenced into buying into fundamentally unsound companies (penny stocks) based on sudden spurts in trading volumes or prices or non-authentic favourable looking articles/stories.
· Don't follow the herd or play on momentum - it could turn against you.
· Don't be misled by so called 'hot tips.'
· Don't try to time the market.
· Don't hesitate to approach the proper authorities for redressal of your doubts/grievances.
· Don't leave signed blank Delivery Instruction Slips of your demat account lying around carelessly or with anyone.
· Do not sign blank Delivery Instruction Slips and keep them with Depository Participant or broker to save time. Remember your carelessness can be very dangerous.

Source