Many novice stock market investors commit blunders right in the beginning. Most beginners have little or no idea of their target territory and direction of movement. If you are planning to make investments in the stock market, make sure you understand your own emotional stability, risk tolerance and basic goals before you even start contemplating an investment. Many beginners wound up quickly because they invest in stocks that are clearly beyond their financial profile.
Understanding one’s investment profile is the first important lesson that every novice investor should learn. With the right information, it is possible to avoid a large number of common pitfalls. Considering the current situation, some of the most common stock types are explained below:
High Risk High Return
If you are a conservative investor, stay away from these stocks! If things go the way you expect, you will be enjoying healthy margins. If not, you will end up losing large sums of money. Abrupt changes in government policies or economic conditions can lead to devastating results. Amazon for example is moving on a clear-cut path that has been defined for several years to come. Visionaries leading such companies pay little attention to stock market moves that last over short intervals. That’s why it is known as high risk and high return stock.
Low Risk High Return
Everyone longs to invest in these stocks and not everyone should! These low risk and high return stocks usually trade at really high valuations in the market. You can expect to find such stocks every day. Only experienced investors can spot them before the market begins to demonstrate clear signs. For example, not many people picked Induslnd Bank in the year 2009 when it was trading well below 35! In most cases, a stock market crash creates a multitude of such opportunities. However, inexperienced investors go by the predominant market sentiment and lose the opportunity to invest in low risk – high return stocks.
Low Risk Moderate Return
These stocks are fine for conservative investors. Even if there is an abrupt crash, such stocks will continue to keep portfolios safe.
Low Risk – High Return
In an insane Bear market, a large number of stocks are low risk and high return type. Seasoned investors do not wait for the ‘must buy’ signal in such cases.
High Risk Low Return
In an insane Bull market, nine out of ten stocks are high risk and low return type. Most investors in the market end up making moves according to prevailing market sentiments.
Moderate Risk Moderate Return
On an ordinary day, majority of stocks are moderate-risk and moderate return type. It is advisable for a conservative investor to utilize SIP methods. Making stock market investments in one go is not very wise.
An investor should have a clear idea of what he or she is doing. Making investments based on a tip or two from someone is not advisable. Proper research is always a plus..