Few Stock Market Mistakes Investors Make

Investing in the stock market is one of the best things you can do with your money, provided that you know what you're doing. If you don'tknow what you're doing, you might as well take your money to Vegas — you might even get better odds. But if you're going to play the market, do it right.

Here are some common mistakes many investors make. Know them and avoid them.

1- Buying a stock because it pays a dividend

A profitable corporation can distribute profits in the form of dividends. In other words, each share gets a certain amount of money. While it's great to get a dividend, it's not wise to hunt them. So, the mistake that a lot of guys make is to buy a stock shortly before they expect it to pay a dividend.
While that sounds good, the problem is that the price they pay for the stock likely reflects the anticipated dividend. In other words, shopping for dividends means you're overpaying.
What to do instead: It's good to have dividend stocks in your portfolio, but they're not the only way of making money. Instead, hold a diverse portfolio, knowing that some of your stocks will likely pay a dividend and others won't for a very long time (if ever). If you do that, you'll find that you're one step further on the road to holding a collection of blue chips (which tend to pay dividends) and more speculative securities (which may be years away from profitability, despite increasing stock prices).

2- Buying a stock before an earnings report

An earnings report is like a quarterly scorecard from a company. But before that scorecard is released, market analysts spend their days making predictions. Most companies meet or beat expectations. The mistake, then, is taking an earnings report too seriously because meeting or beating earnings just isn't news. So, if your strategy is to speculate based solely on earnings reports, you'll be basing your predictions on accounting tricks.
What to do instead: Earnings reports have their place, but you want to use them as a signal. What should you be looking for? The company that doesn't meet its earnings.
Why?
Well, it may be a good investment, depending on why it didn't make its earnings and what it can do to change that (you'll have to investigate). But in the meantime, the stock price has likely gone down, which means there could be an opportunity for you.

3- Buying into the hype

Remember Pets.com? It was pretty much the poster child for hype in a boom market. In fact, there was so much hype around Pets.com thatJeff Bezos (CEO of Amazon.com) later confessed that investing in that company was one of his biggest mistakes. But what happened to Jeff happened to a lot of guys: They got carried away by the hype (and by a stock price that grew in leaps and bounds daily). In the end, the company was worth nothing.
What to do instead: It's easy to tell you not to believe the hype. But that is, in essence, what a lot of guys should do. Few companies out there can live up to the hype, so you should take it with a grain of salt. When you see a rocketing stock price and all you hear is about this hot, new company, think to yourself that these are warning signs, notinvestment signs. Remember; living up to that kind of hype is a once-in-a-lifetime investment.

4- Assuming that if a stock price is low, it's good to buy

Buy low, sell high, right? Well, maybe. Just because a stock price is low, doesn't mean it's a good buy. And, conversely, just because the price is high, doesn't mean it's a bad buy. The mistake is not knowing that "buy low; sell high" is really shorthand for "buy stocks that are undervalued and sell stocks that are overvalued."

What to do instead: High and low are relative terms — $300 may seem like too much for a stock, whereas $3 might seem like a bargain. But you have to put the trade in context. Ask yourself if the company is under- or overvalued at its present price, based on market cap and P/E. That's the mark of 6- Blindly following the lead of an anchor investor
Sometimes it's easy to get the business page confused with the gossip column; after all, both do a ton of name dropping. A lot of guys make the mistake of following a big-name investor like Mark Cuban or Kirk Kerkorian.The even bigger mistake is thinking that by copying them, you're guaranteed a payday. First, there are no guarantees. Second, even if they are right, they haven't told you their strategy, so you won't know when to sell.
What to do instead: You should follow what some of these investors are doing (if only because they have the capital to move markets). But by follow I mean pay attention to, not copy. In short, know everything you can, but think for yourself.

5- Not cashing out & locking in your profit

At some point, you need to take profits. But when you take profits (sell), it can make all the difference. The truth is that there is no easy answer for this. Sadly, a lot of guys get a gambler's mentality when it comes to profit taking. That's the mistake. Or, they see a little bit of profit, and hit the panic button and sell too soon. That too is a mistake.What to do instead: Look at the profits (rate of return) that are common to the sector. The key is to be realistic. What you need to do is stay disciplined and not get greedy or scared. Plan your profit taking as carefully as you plan your investing.

6- Not cutting your losses

Stocks move up and down. But sometimes a stock suffers a steady decline. Surprisingly, some guys see that happening and they root for their stock like it's their favorite sports team. In other words, they become emotional. Day in and day out, they obsess over a declining stock price as they lose more and more money.What to do instead: Short and sweet, sometimes you need to cut your losses. Success is a relative term when it comes to investing. Ideally, we think of success as how much you make. But sometimes success is about how little you lose. A smart investor not only knows when a stock is in a tailspin, he has the courage to let it go, so he can take his money elsewhere and start making it back.

7- Not doing your own research

Chances are that you have more than a few friends with their own ideas about investments. The mistake that most guys make is taking their friends' advice at face value. This isn't to say that you shouldn't trust your friends. They could be right. But copying them without questioning them is like giving away your money and hoping it comes back.
What to do instead: Find out where your friends get their information. If they have a broker that has made them a lot of money, ask for a referral. If they have their own strategy, ask them to teach you (it may not be the best strategy, but any worthwhile strategy should be able to hold up under the scrutiny of a student).

8- Gambling on penny stocks

With their low prices, penny stocks look like sexy investments. But there are two problems with such stocks. First, small prices typically mean smaller margins, so the transaction costs can eat you alive. Second, penny stocks are more susceptible to fraud and manipulation. While most penny stocks are legit, it's an area where crooks ply their trade.
What to do instead: Penny stocks aren't for green investors, despite their price. Why? Because to make money in penny stocks, you need resources. Furthermore, transaction fees are likely higher when you're trading a high amount of stocks. Investing always means doing research, but you won't read about penny stocks in the business section, so you'll need the resources to dig a little deeper.

9- Being afraid to invest during bad times

For the most part, the economy moves in cycles. Boom years are followed by bust years. While you can't seem to keep guys away from investing in boom years, it's like pulling teeth to find investors in the bust years. Of course, there are more bargain investments in leaner times, so staying out of the market in those years can be a big mistake.
What to do instead: Remember this rule: economic downturn is an investment opportunity. While that doesn't mean going all in when things turn south, it does mean that you should look at the market with a different eye. Don't be discouraged when things are tough, and don't follow the crowd.

10- Blindly following a broker

Do you have a friend who begins every sentence with, "my broker says..."? Well, so what? More than a few guys get burned by blindly following their broker's advice. Is he an expert? Yes. Does he have an agenda? Quite possibly. Does he have the power to predict the future? Of course not.
What to do instead: You should listen to your broker. But you should also question him. Remember; at his core, he's a salesman, so he's trying to sell you something. Press him on details. Why is this stock the next great stock? Did he invest his own money in it?

11- Not staying on top of your investments

Some guys spend months doing research, setting up a diverse portfolio only to make their initial buys and go to sleep at the wheel. It's puzzling, but it does happen. The trouble is that the market won't call you before things change. As a result, a lot of guys wake up one day to find themselves busted.What to do instead: It depends on the type of guy you are. If the trouble is that you'd like to follow your investments but you just don't know how, you'll want to take advantage of the tools offered by your brokerage house. All brokers offer them and they work like household accounting programs. On the other hand, if you're just lazy (it happens), you probably shouldn't be so active in the market: look for mutual funds where you'll only have to review things on a quarterly basis.

12- Entirely selling a winner

When you make a profit, it's only natural to want to sell and take that profit elsewhere. Conversely, a lot of guys look at their losses and hold onto them hoping they'll get back to even. While those may seem like different problems, they have the same root cause: misallocating your money. While nothing is constant, the above strategy actually has you pulling away from winners and getting closer to losers, which doesn't make any sense.What to do instead: It's okay to take a profit (in fact, it's smart). But unless you think the bottom is going to fall out on your stock, don't sell it all — hold on to some of the winner stock.

13- Trading too much

Being a trader or being active in the market doesn't mean making a ton of trades. But some guys make trades the way the rest of us order drinks (pretty much without thinking). While they may know what they're doing when it comes to the trade itself, what they're missing are the transaction costs. Each trade has a commission fee and each trade has tax implications. So, if your profit margin is slim, chances are it will evaporate with fees and taxes.What to do instead: Never let fees and taxes dictate your trading moves. If you have to change your position, do it. But don't ignore fees and taxes, and don't get trade happy.

14- Assuming that if you like the product, the stock is good

How often have you and your friends enjoyed a product (like a Krispy Kreme donut) and said that you should own stock in the company? Well, some guys incorrectly assume that a great product equals a great stock. But the truth is that there's more to a good company than a good product.What to do instead: Look at the product as a good starting point. Okay, you found the next big thing. Now do your homework. Learn everything you can about the company from its management team and its business plan to its stock performance. Then make your investment decision.
Make money by avoiding mistakes

In total, we discussed 14 common mistakes that investors make. Sadly, this is by no means an exhaustive list. The truth is that all guys make mistakes with their money. But what separates the winners from the losers are the guys who can apply what they've learned.A mistake is bad in and of itself, but it is insurmountable if you don't learn anything from it, because you'll likely repeat it.

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Best Practices in Investing!

Below are ten guidelines that are smart and often necessary to follow in order to be successful at long term investing in stocks.

1. "Buy low and sell high."

This is a very obvious bit of advice but achieving this goal can be more difficult than it might seem and this simple rule can be easy to forget. An obvious key to successfully investing in stocks is to pick investments to buy that will increase in value over time and then eventually sell the stock at a higher price. Some of the recommendations and guidelines that follow may be helpful in following this first principle.

It is important to understand that it is impossible to time the market precisely. Even very skilled investors make mistakes, but they learn from them and gradually make fewer bad investment decisions over time. No investor buys and then sells at exactly the right price. But good stock investors have the strategies, knowledge, and discipline to, much more often than not, buy shares of stock at lower prices than what they sell them at.
In order to "buy low" and "sell high" it is sometime necessary to do the opposite of what the majority of investors seem to be doing. This is called being a contrarian. When everyone else is pessimistic about a company they have likely acted on their negative opinions and sold shares of its stock. On the other hand, when investors are very optimistic about the prospects of a company, they have likely already acted on their hopefulness and purchased the stock. An investor who can buy at an extreme moment when others have been selling and sell when others have been aggressively buying may be able to accomplish the goal of "buying low/selling high" more often than those who follow the general consensus.
Unfortunately, this strategy doesn't always work! Sometimes there are good reasons for investors' pessimism and a company is headed from bad to worse. Someone who buys when everyone else is selling may end up owning stock in a company with grim long term prospects. Alternatively, selling shares of a great company with wonderful long term potential (e.g., Microsoft in the early 1990s; Apple in the early 2000s) too soon can be very frustrating as well. Needless to say, successfully investing in stocks is never easy.

2. Understand what you are buying.

It is a good idea to have an understanding of the company you are purchasing shares of its stock and be able to list solid reasons for why you think the company’s earnings will increase over time. Many investors rely on the advice of investment professionals and investment services for recommendations on stocks to purchase (or sell). Seeking out multiple sources of advice and opinion is a good idea in order to more fully appreciate the pros and the cons of buying a particular stock. Pay attention to who provides good versus bad advice so that, over time, you can learn whose opinions to better trust. If you are making your own investment decisions, it is not a good idea to put all of your trust in any one individual or one investment services' advice. Consider multiple opinions and do your own thinking as well.
Some investors meet with success by investing in companies for which they already have a very good understanding (or hold a good opinion of) because they like what the company makes or the service they provide. This is a perfectly valid and, often, useful strategy. At the same time, it is a good idea to do some research about the past financial performance of a company and projections for its future earnings. Personal experience can help, but there are many reasons why it will not always lead to accurate predictions about the future stock price of a company.

3. Patience is a virtue.

Sometimes an investor can be right about the stock he or she has purchased but wrong on the timing as to when it was bought. A stock might go down after it is purchased, but ultimately go way up in price thereby creating a nice profit. In the long run, a company's stock price will likely go up if the earnings of the company increases. In the short term, it can be very hard to predict what causes the price of a stock to go up or down. More often than not, patience is a virtue when it comes to successful stock investing. If history is a guide, in the long run the stock market goes up and many established companies will do well as the broader national and world economies grow.

4. "Growth at a reasonable price" investing.

Two major strategies for choosing stocks to buy are "growth-oriented" and "value-oriented" approaches. Investors who favor growth stocks look to buy companies which have earnings that are rapidly growing each year (or expect to have significant earnings growth in future years once they become more established). Investors who like to purchase value stocks look for companies that are selling at a very cheap share price in relation to the earnings per share (i.e., they have low P/E ratios). Value investors are less focused on looking for companies with rapidly growing earnings and more interested in buying what appear to be "bargains." Both types of strategies can be effective. Growth investors can meet with success by identifying companies early on that will continue to grow their earnings for many years to come, with the share price rising as well. Value investors can meet with success by identifying companies that have experienced temporary setbacks and purchase shares of stock at discounted prices (i.e., when they get oversold by other investors who are overly pessimistic about a company's situation).
The major risk that growth investors run into with their approach is that they will pay a very rich price for a company with seemingly good long term prospects. Even a small disappointment in the earnings of a company with an expensive stock price (i.e., high P/E ratio) can result in a big drop in the share price as investors reconsider how fast the company will grow its earnings and sell the stock. A major setback in a company with a high P/E ratio can devastate its share price (e.g., the price of a stock could drop 25% or more on bad earnings news). Alternatively, with a value-oriented investment approach, the risk in owning what appears to be a cheap stock is that what seems like a temporary setback is actually much more serious or permanent in nature. A low share price, which looks like a bargain, may be well justified and the price could head much lower as more investors sell the stock after they come to recognize the long term nature of the company's problems.
Another investment strategy that attempts to blend the best of the growth and value-oriented strategies is called "growth-at-a-reasonable price" (GARP). Investors who follow this approach pay particular attention to a stock's PEG ratio. This is the P/E of a stock divided by its annual earnings growth rate. PEG ratios under 1.0 indicate that a company's P/E ratio is less than its growth rate. The lower the PEG ratio the more it suggests that the stock is reasonably valued (or even undervalued). Alternatively, the greater the PEG ratio, the more expensive the share price would seem to be.

A GARP investment strategy can offer protection against the problematic risks of both growth and value-style approaches. Investors who follow a GARP approach in a disciplined manner will draw a limit on what they are willing to pay for a stock with fast growing earnings. GARP investors like companies with fast growing earnings (the denominator in the PEG ratio) but, at the same time, will insist that this growth rate be high enough to justify a stock with a high P/E ratio. Likewise, GARP investors will not purchase a stock simply because it has a very low P/E ratio. If the company's earnings are not also increasing at a decent rate, they will avoid buying the stock for fear that the company's earnings have stopped growing (or worse have begun to decline).

5. Some of the "secrets" to Warren Buffett's success as an investor.

Many people consider Warren Buffett to be the most successful stock investor of all time. Beginning with a relatively small sum of money to invest in the 1950s, Buffett's investment company, Berkshire Hathaway, now has a market capitalization of over $250 billion and Buffett, himself, is currently one of the wealthiest individuals in the world. Buffett's success is due to a very disciplined and shrewd approach to buying the right stocks and holding on to them for long periods of time, only to sell them if the reasons for his initial investment have changed significantly.
Buffett is a great illustration of an investor who has followed the above listed guidelines virtually to perfection. He has a keen knack for "buying low, then selling high." He is very patient in his approach, both in terms of waiting until the right opportunity comes along before making a stock purchase and then owning shares of stock in a company for a long period of time to allow his investment thesis (i.e, the reasons why he likes the company and purchased the stock) to be borne out. Buffett tends to stick to investments where he can understand the business the company is in well enough to make thoughtful and independent decisions. For example, he personally is uncomfortable owning technology-oriented companies as he does not feel he understands the products these companies make (nor trends in the broader industry) well enough to make smart investment decisions. Buffett's investment approach is probably best categorized as a "growth-at-a-reasonable-price" strategy. Some people consider Buffett to be a value-oriented investor, given his tendency to buy shares of stock in companies when they appear to be "bargains" but Buffett is careful to avoid companies that do not appear to have bright prospects for their future earnings.

When Buffett discusses his investment philosophy he will highlight several things he is looking for in a company that he wants to invest in. The following include some of the most important things he looks for:

a) "A durable, competitive advantage." By this Buffett means that he wants a company that is relatively difficult to compete against; hence it will likely be able to sustain a high profit margin over time. Companies which have strong brand-name products (e.g., Coca Cola, Proctor & Gamble), or have patent protections on their products (pharmaceutical companies), or have very strong customer loyalty and high customer retention rates tend to have a "durable competitive advantage" over their competitors.
b) A competent and honest management. For obvious reasons, Buffett is only interested in investing in companies for which he respects and trusts the key managers of that company. An incompetent, and especially a dishonest, management team at a company can spell big problems and Buffett wants nothing to do with investing in a company where he has reason to doubt the abilities, strategies, or ethics of the managers of the company.
c) Pay a "reasonable" price for a stock. An indication of Warren Buffett's patience as an investor is that he refuses to overpay for a company's stock. While he may love thecompany, if the price is not right, he will not like the stock and seek out alternative investment opportunities or wait until the stock price becomes more attractively priced. Nevertheless, Buffett is not a cheapskate. A well known quote of his is that "it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." This is spoken like a true GARP investor: Buffett is willing to pay a reasonable price for a company with great future prospects and would choose to invest in such a business over a company that has a cheap stock but only modest potential for improved future earnings.

Another key to Buffet's success is his temperament. He seems much better than most investors at staying calm when others are panicking over short term concerns about the stock market or a particular company. In fact, Buffet welcomes it when other investors are very worried, as it may create potential to buy companies that others have hastily sold. Another famous quote of his is as follows: "You pay a very high price in the stock market for a cheery consensus. Uncertainty is actually the friend of the buyer of long-term values."

6. Don't take a big loss.

Another piece of important advice from Warren Buffet, considered the greatest investor in modern times, it to make sure to avoid taking a big loss. If an investor loses half of his money on a bad investment decision he must then double his remaining money to get back to even. In other words, a loss of 50% requires a 100% gain on what remains in order to return to the original amount. The best way to avoid taking a big loss is to avoid investments that hold great risk. If you do invest in something risky, it may be advisable to sell the stock if it begins to drop significantly in value in order to better preserve one's investment capital.

Warren Buffet's first rule of investment is "Don't take a big loss." His second rule of investment is: "Don't forget Rule #1!"

A corollary to Buffet's rule is a piece of advice offered by Jim Cramer of the CNBC show "Mad Money": "Ring the register; no one ever lost money taking a profit." In particular, he directs this advice to investors who have seen shares of stock they own go up significantly in value. It may not be necessary to sell all shares, but it is a good idea to sell some shares in order to ensure that you realize a profit. For instance, if a stock doubles in price, some investors will sell half the shares they own, thereby recovering their initial investment and knowing that the remaining shares they own represent pure profit. Such a disciplined approach in taking profits helps to protect investment gains. However, it is a good idea not to reinvest the proceeds of such sales in companies within the same industry (e.g., selling stock in one energy company, then buying another company in the energy industry) in case the entire industry runs into difficulty and the stock price of all companies in that industry go down.

7. Be aware of your emotional tolerance for losses

Typically, the stock market goes down in value a lot faster than it goes up. Months of gains in the stock market can be wiped out in the span of several trading days if there is significant new developments that cause investors to rethink their investment strategies. For most people, the agony of losing money through investing is worse than the pleasure gained from making money. Understand your ability to withstand temporary investment setbacks and do not exceed your tolerance for volatility and risk. If a person does exceed his or her tolerance, he or she will be much more likely to sell at the first moment of panic when smart investors are "averaging down" (accumulating more shares of stock in a company at a lower price).
The stock market swings between extremes of human greed and fear. The best investors recognize these extremes and try to take advantage of them. Always set aside some of your investment money in the form of "cash" for extreme events that cause the stock market to significantly sell off. Such a cash cushion allows investors to better weather a market downturn and to take advantage of companies that suddenly see their stock price drop for no good reason due to widespread investor panic. Taking advantage of a good buying opportunity when many other investors are fearful is only possible if you yourself are not also in a panic. Be aware of the extreme emotions of greed and fear in yourself. Succumbing to either these emotions (selling due to fear and buying due to over optimism and greed) is the cause of a lot of investment mistakes.

8. Dividends are important.

Dividends can play an important role in terms of one's success investing in stocks. Companies that pay dividends tend to be more established and have stable earnings than companies that do not pay a dividend. If you select stocks to invest in that pay dividends, you will find yourself gravitating toward safer, stronger companies. In addition, dividends provide current income to an investor. Dividends can add to one's overall gains (the profit from an appreciation in the price of a stock from what you paid for it) or offset losses. Another important quality to dividends is that they can grow over time and can come to represent a very significant component of the benefit of having invested in a particular stock. For instance, if a company increases its dividend each year and one owns the stock for a long period of time, the dividend yield (the amount paid in dividend each year divided by the stock price) can grow to be quite significant, particularly with regard to the original price paid for the stock. Finally, most dividends are taxed by the federal government at a rate of 15%, which is lower than the tax rate on earned income for many tax payers.

9. "Don’t confuse a bull market for genius."

When things are going well in the stock market it is a good idea for investors to stay modest about their stock picking abilities. A bull market lifts the stock price of most companies. The general trend of the market may be more behind an investor's current success than his or her skill at picking stocks. Conversely, an investor should not be too hard on him or herself in a bear market when most stocks are going down in price.

10. Adapt to changing circumstances.

If you come to learn about something new about a company which you have invested in and it causes you to wonder if you have made a mistake to purchase its stock, try to differentiate between temporary problems that can be corrected and more serious developments that may permanently reduce a company’s earnings. If a problem seems temporary in nature, it may be smart to hold on to the stock or even to buy more shares if other investors have been too quick to sell it. If the problem is most likely permanent, probably the best thing to do is to sell the stock and reduce your loss (or preserve your gain).
An easy "mistake" to make is to invest in a company that make products (or provides services) that can be made obsolete by newer technologies which come along. When a new technology develops or something else changes in a significant way that will harm the future earnings of a company, it may be wise to see the "writing on the wall" and sell the stock. Circumstances change and developments emerge that were not easily foreseen. All good investors take in new information and reassess their investment decisions based on new facts. Good investors force themselves to "listen to what they don't want to hear." In other words, if there is bad news about a company, it should be acknowledged and one must then think about the long term implications such news has for the earnings potential of the business.

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How Index is Calculated?

Sensex Calculation Methodology 

Sensex is calculated using the "Free-float Market Capitalization" methodology.

As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.

The market capitalization of a company           = Price of its  stock *  Number of shares.

The free-float market Capitalization.       =This market capitalization * the free-Float factor to determine

The base period of Sensex is 1978-79 and the base value is 100 index points.

This is often indicated by the notation 1978-79=100.

The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc.

During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.

Example:-

Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.

Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.

Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).

Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).

So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.

Thus the value of the index today is = 296,000 x 100/60,000 = 493.33

This is how the Sensex is calculated.

The factor 100/60000 is called index divisor.

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