Investing expectations vs reality
Expectation #1. I will become rich overnight
From our friends or our cousins we sometimes hear that they got doubled their money within a few times and from that perspective, we made an opinion in our mind that the stock market can make you rich in some time. We all know that the stock market works on compounding which shows its result in the long term unless you are lucky enough that you buy a stock and it does double your money within a month. But the reality is by generating 15-20% per annum we can make a good wealth in long term it will need a number of years. If you want to create a huge wealth you need to be invested in the stock market for at least 20 years. But what most people do is they just hold the stocks for a few months and replace it with another one but this is not called investing and if you are doing like this in the beginning trust me you will end up losing more than half of your money. I am not saying that it will take your 20 years to make you rich, if you are an intelligent investor and pick up the good companies you can become rich even in 10-15 years. If you have heard about warren buffet then you may know that he became a millionaire in his 30s but remember he started investing when he was just 12 years old. He earned most of the wealth after the age of 60 so you can imagine how compounding works. I know many of you are might be thinking that what is the benefit of that money if we are too old to use and cannot use that money at a young age. So if you want to become rich in a shorter period you need to increase your income sources along with investing.
Reality; You can create wealth in the long term if you are an intelligent investor and pick up good companies. If you want to become rich soon you need to increase your income sources.
Also read; 5 stock market basic tips for beginners.
Expectation #2. Let's buy a penny stock it will multiply our money within a month
I know when a beginner enters into the market he/she attracts towards the penny stocks in the expectation that it will multiply his/her money two to three times. The common thinking of most of the beginner is that if they are buying a stock worth rs. 1000 than they can buy 100 stocks which has a price of rs. 10 and if it goes up to 15 rs then they can book profit. But in most of the cases it happens opposite, the stock fall down and they have to face losses yeah if you are lucky enough then it will go according to your expectations. Usually penny stocks are used for the trading purpose by the big traders of the market and a beginner end up with the losses. I am not saying that every penny stock is bad for investing. In the end all the big companies like Infosys, Wipro, titan once a penny stock and of course it cannot be denied that a stock which is trading at a very low price and called as penny stock can be converted into a big company like these but finding the next Wipro and Infosys from the hundreds of penny stocks is not an easy task.
Reality; When we invest into the penny stock we become a pawn of big traders which results in we lose our money. So I suggest you stay away from penny stocks.
Expectation #3; I will become rich if I will take the high risk
It is obvious in the stock market that if you want to earn high returns then you need to take high risks but many investor take it in wrong way. Taking risk doesn't mean that you start investing into the small and micro-cap stocks without any analysis. The big investors of the market spends lot of days to find a stock in which they are going to invest and you think without any analysis you are investing in a random company and it will make you rich because you are taking risk. Here am not saying that small and micro-cap companies are bad to invest and the large-cap companies are good to invest. If you pick a good small-cap company you can earn more returns because the small-cap companies grow faster as compare to the large-cap companies. It is always use to said that we should not invest in the falling market because everyone exits from the market that results increase in supply and decrease in demands but that is the time one need to invest and take risks. In 2020 when covid-19 arrived, we saw a huge fall down in all the countries economies. But there are some investors who took advantage of this pandemic when all the best companies stocks were available at the discounted price, they bought those best stocks when all the investors were exiting the market.
Reality; Yes, In stock market it is obvious that if you want to be rich soon you need to take risk but intelligently. Most of the investors invests without any analysis which results in huge losses and then they call the stock market as gambling.
Expectation #4. We don't have to work as we started investing
Many people think that if we start investing in the stock market we won't need to work anymore. You can't be dependent on the stock market to feed your family. Investing can give you the early retirement like in your 40s if you invest intelligently. But if you are thinking that you can quit your job from the day you started investing in stocks then it can't be happen in the beginning because as you all know that stock market works on compounding which takes years to create a wealth. Yeah, there are some ways through which you can earn a regular income like trading. If you trade using leverage you can earn even more than your salary but it requires a lot of knowledge of technical. You should know how to read the charts, how moving averages work. and there are many indicators you should know about if you want to earn regular income through trading. But personally I will suggest you to stay away from this as most of the time it results in losses.
Reality; You can't quit your job from the day you started investing in the stock market as it takes years of time to create a wealth. But yeah it will help you to retire early once your portfolio is enough that you can earn regular income through dividends and capital gains then you can quit your job.
Expectation #5. The stock price will only go up after buying
In the beginning it usually happens with everyone we buy a stock and keep our eye regular on the stock price. Our common expectation is that the price will only go up after we invest in it. I still remember when I bought my first stock I used to keep my eye regular on that stock and a little fall down in the price used to make me panic. It usually happens with everyone when the stock falls we decide to sell it and buy the another one and in the end we almost loose our most of the capital. But yeah we learn from the mistakes. We need to hold the stock if we bought the stock by good analysis and if the price falls after investing we should be happy that the stock is now available at a particular discount so we can increase our investment in that. In stock market the fall down in a particular stock on daily basis is very common. In the end, the movement of the stock price depends upon the demand and supply. If you have pick the good stock you will be in profit you don't need to be panic on every fall down.
Reality; The price of a particular stock can fall down for a shorter period but in the end if you have chosen the good fundamental stock then you will be in profit.
Expectation #6. I will buy the stock when the price will fall a little more.
"The stock price will fall a little more, till that time I'll wait." Most of the investors have an opinion like this and most of the time they lose the opportunity to buy a good fundamental stock at a lower price. Let me give you an example, Recently in the covid-19 pandemic when the stock market was falling down continuously bajaj finance stock was trading at around 2100 rs. which used to trade at around 4800 before the pandemic, and at that time when the stock was already fell down more than 50%, I decided to buy. But I saw that there are many investors who used to say that the stock price will decrease down to 1500 rs. then they will buy and you all know what happened after that we saw a huge rally in the stock after it made a low of 1783 rs. I believe that most of the investors had missed the opportunity to buy a good fundamental stock at a very discounted price. We never know that what is going to happen in the stock market next so if you think that the stock is available at reasonable price you should buy it and if the stock falls more you can increase your investments in that particular stock.
Reality; Most of the time we lose the opportunity to buy a good fundamental stock at the discounted price. So if you think that the stock is already available at a reasonable price you can buy it and if after that the stock price falls you can increase your investment in that particular stock.
Suggested book; How to avoid losses and earn consistently in the stock market.
Expectation #7. I will invest in the index fund as the market will never go down in long term.
I know many of you will be saying that even Warren Buffet had suggested to invest in the index funds but you know what when you invest in index funds you miss many opportunities to make money. In last 10 years Nifty 50 has given the returns of 6 CAGR (as of March 2020) which means if you were invested in the index fund then you have only been able to beat the inflation. But believe me if you invest in even safe stocks rather than index funds you will be able to generate 15-20% easily. If you are making excuses that you don't have time to analyze the stocks you can pick the good fundamental stocks like HDFC Bank, ICICI Bank, Bajaj Finance etc. There are many good fundamental stocks which can give you 12-15% returns per year and you don't need to do that much research on them they are the market leaders in their industry. If you want to retire early and build a good wealth for you invest directly in stocks rather than investing in the index funds. I am not saying that index funds are bad investment i just want to say that you can generate more returns than that.
Reality; You can generate high returns easily as compare to the index funds, even if you pick the market leaders.
Also read; How the stock market works?
Expectation #8. It is not a good time to invest as the stock is trading at its all time high.
You want to invest in a stock but the stock is trading at its all-time high price so you think it's not a good time to invest you decide to wait for the lower price. But imagine if the price will never come down as your desired price? It's all depend on the situation of the company if a stock is going up without any reason ( the fundamentals of the company are constant ) it is most probable that the price will come back to the reasonable price. But there can be other circumstances as well. Let's take an example, recently many big investors came into the reliance industry to invest which resulted a huge rally in the stock and we saw that reliance were making a new all-time high everyday. Do you think that the rally has occurred without any reason? absolutely not. So sometime not investing because the stock is making a new all-time high everyday is not a good decision. I am also regretting for that I have not entered when it was available at a very lower price. So I have also entered at a very high price but i am happy that at least I have invested in the reliance industries.
Reality; Sometimes it depends upon the circumstances. There can be a situation in which the stock price won't come down to your desired price. In that case, you can pick up the stocks at a particular frequency gap. If the stock price fall after that you can increase your investments.
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