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Traps that lead to market under performance

Traps that lead to market under performance

The stock market gives equal opportunities to all the investors to grow their wealth and increase capital. Even though every market participant receives same information and same scenarios there are a few who under perform while others excel. 

According to the “Efficient market hypothesis” all asset prices represent its fair value. As it has all the information related to the assets has been taken into consideration by all the participants. According to this theory there is no opportunity for the investors to buy stocks below their fair value. Further to make profits in the due course. However, “Efficient market hypothesis” is just a hypothetical scenario and the stock markets consider it as a lucrative medium for profits.

If there is provision for all the participants with the same information then what are the factors that lead to market under performance?

Following are a few factors that lead to market under performance:

Wrong time of entry/exit

Inexperienced investors under perform the most due to the wrong timing of their entry or exit in a particular market product. This generally happens due to hasty decisions and fear of losses. A study of certain stocks can be different than other stocks. Study of technical charts and in-depth analysis can enable an investor to tackle this problem.

Herd mentality

Herd mentality in layman language typically means following the crowd. This too is a characteristic of an inexperienced investor. Here it so happens that a large number of investors begin buying/selling a particular stock and attract small inexperienced investors to follow the herd. These small investors buy/sell copying the trend of the larger group. This may lead the investors to fall prey to market manipulation. A proper study of the stock and evaluating the reasons for spurts in buying/selling guides investors in making right decisions

Overconfidence

There is a certain group of investors who do the research and analysis of their own. However, sometimes it happens that these investors get overconfident about their study and analysis. It is research of your own is recommended to tackle falling prey to the herd mentality. But this research needs to be cross verified with the industry reports. None has cracked the code for success in the stock market and needs to be thorough with the market conditions.

Risk analysis

Everyone knows the basic principle of risk: higher the risk higher the return. Surely higher risk provides higher returns. Although there are a number of factors the investor must keep in mind before taking the required risks. There are various risk managements principles put forth by experts. For example, some experts say that risk appetite should be based on an investor’s age. Say, my age is 30 years, and then according to this principle, I should invest 30% of my available wealth in fixed income products. Whereas I should invest the remaining 70% in higher risk products like equity shares. Following the previously established mantras may increase the vulnerability of an individual’s portfolio to higher risk rather than managing it. Therefore, every individual should manage his/her risk according to their own requirements.

Market manipulators

Market manipulators feed on the inexperience of the new, small time investors. Disguised as expert opinions or well wishers advice, these manipulators push the investors into a trap. These traps enable take away the wealth of these investors. Spam messages/E S mails are the most preferred medium of spreading false news and advices about a particular stock. The governing bodies have tried to tackle such incidences from happening but it still prevails. The best action to tackle such market manipulators is to be aware and to perform own research and analyze thoroughly.

Half-knowledge

It’s said that half knowledge is dangerous. An investor needs to be well verse with his concepts and needs to stud the market in order to make profitable investments. An investor with no knowledge whatsoever may invest as per the advice of the experts in that field. But, an investor with half knowledge may think that he knows everything about the particular stock. They later take wrong decisions in the due course. This is referred to as the Dunning-Kruger effect. It is well advised that all investors should gain as much knowledge about a stock market product or a stock before investing. Rather than falling prey to their own belief of knowing everything.

There are various traps in the market which may lead a person to underperform. A person can avoid these traps completely by careful study of various factors before investing. An investor can grow endlessly in the stock market and experience and understanding of these malpractices can make one an ideal investor.

 

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