- It is often seen that after completing four to five profitable trades, retail investors enter the risky arena of margin trading and derivatives trading.
- In margin trading, the investor puts in a small amount and the broker allows the client to take 4-5 times the exposure to the value of the investment.
- Not making partial profits in a bull market is a common mistake retail investors make.
New Delhi: Many new retail investors have opened demat accounts over the past year to take advantage of the bullish stock market rally. However, it should be noted that retail investors are very prone to making mistakes in a bull market which can cause irreparable damage to their portfolio. Here are five of the most common mistakes retail investors should avoid during a bull market.
Buy hot sectors
Retail investors who invest directly in stocks during a bull market should specifically avoid investing in a particular industry that has already seen significant rise, such as the pharmaceutical and IT industry from now on. Even they should avoid investing in sector funds, which have already generated good returns. Ideally, investors should invest in a sector that has so far underperformed the broader markets, but is expected to recover soon. If you don’t have the expertise to choose such a sector and stocks in that sector, then it is better to invest in index funds or well-managed diversified funds.
Switch completely from mutual funds to direct stocks
Many retail investors, after making money in a bull market, believe they have the expertise to invest directly in the stock market, which is why they switch completely from mutual funds to direct stocks. This is evident from the sudden increase in the number of demat accounts in the country. However, be aware that every bull market is followed by a bear market and an experienced fund manager can only minimize portfolio drawdown in a bear market.
Retail investors typically burn their fingers in a bear market, as they invest primarily in small and mid-cap stocks, which correct more than the benchmark in a bear market.
Chasing high-priced IPOs
Many promoters and early investors in private companies are taking advantage of the bull market and offering initial public offerings of their shares at sky-high valuations, leaving nothing on the table for investors. Retail investors should stay away from these issues and there have been many instances in the past where retail investors have burned their fingers investing in IPOs of companies at the height of the market. For example, Reliance Power, which went public in 2008 when the bull market was about to peak. The IPO investors in this company could never get their IPO investment back.
It should be mentioned here that during the current quarter of October and December, IPOs worth Rs 80,000 crore are expected to hit the primary market. Investors should be extremely careful when applying for these IPOs. There are a few simple rules that investors should follow in order to avoid losers. First, only invest in IPOs from blue chip investment bankers. Second, avoid issues where money is not raised for business expansion, but by promoters or early investors by reducing their holdings. Third, avoid heavily indebted companies.
“Corporate governance is very important. Investors should avoid IPOs from promoters who wrote off their companies earlier at lower prices and come back with higher-priced IPOs, ”said Daljeet Singh Kohli, CIO, StockAxis.com, as quoted by And Wealth.
Investors should also compare valuations with those of listed companies in the same industry. However, this is difficult when it comes to single players such as Zomato or Paytm.
Use leveraged trading and intraday investing
It is often seen that after completing four to five profitable trades, retail investors enter the risky arena of margin trading and derivatives trading. In margin trading, the investor puts in a small amount and the broker allows the client to take 4-5 times the exposure to the value of the investment. In margin trading, if the price movement favors traders, it makes a lot of money. But in the event that the price movement occurs in the opposite direction of what the trader thought, then the trader tends to lose all of his capital. So it is never advisable to engage in a leveraged trade in a bull market.
Recently, Sebi has increased the margin requirements for day trading, so that commercial interest in the futures and options (F&O) segment has increased. It should be mentioned here that the F&O segment is much riskier than intraday margin trading.
Don’t reserve partial profits in a bull market
A common mistake made by retail investors is not to make partial profits in a soaring bull market. As the markets rise, an individual’s perception of risk undergoes a change. Changing risk profile is a common occurrence during bullish and bearish markets. The same person who has avoided risk during bear markets usually takes high risk during bull markets because of the historically high returns. For example, 5-year SIP yields are already above 20% (see chart). It would be foolish to expect similar returns in the years to come.
Although experts ask investors to be greedy in bear markets and fearful in bull markets, most investors do the exact opposite and lose money when markets suddenly fall. It can be noted that when a sharp drop in the market occurs, you will not have the opportunity to make a profit and exit. So it is always advisable to make partial profits when the markets are in full swing and move the money to safe investments like term deposits so that when the markets fall you can enter low levels again.