With Surge In First-Time Millennial Investors, Financial Education Becomes Imperative
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Retail investors leaned towards the stock markets during the Black Swan event of the century: The COVID-19 pandemic. The event has left many jobless or many witnessed salary cuts. For many Millennial, work from home became the new normal. Data shows the number of people trying their hand in stocks has increased to a record high so far in financial year (FY) 2021. According to Securities and Exchange Board of India (Sebi) data, new dematerialised or demat account additions rose to an all-time high of 10.7 million between April 2020 and January 2021. This is an increase of more than double the new accounts opened in FY20 at 4.7 million.
Not only has there been a surge in the first time users, data trends have also shown that in the post pandemic world, millennial Indian investors have started opened demat accounts to start trading, in sync with the global trend. Stock trading has also become more gender inclusive with more female participants in the market as traders or investors as opposed to a few years ago.
There are many factors leading to this massive surge of investors in India. One of the key factors being the penetration and access to technology. Technology has enabled individuals to easily access the stock market and open demat accounts in a few hours as compared to times when it used to take weeks for the same. Not only technology, but also budget brokerage platforms and rise of awareness around investing have also facilitated the surge.
However, this surge has also created some unfavorable conditions for new investors. While access to the stock market has become effortless, lack of proper guidance and knowledge leads these investors to commit mistakes that can be avoided with proper knowledge of the system.
After teaching and interacting with hundreds of new millennial investors, four commonly done mistakes are listed here that will help investors to tread with caution and be careful as they move forward.
Lack of diversification in stock selection
To minimize risk, it becomes imperative for an investor to diversify her portfolio and learn from the old saying that is, “Do not put all your eggs in one basket.” Most new investors incline towards a few stocks and invest all of their savings. As a result, the portfolio is over concentrated and there is no diversification.
Cherry picking stocks
There is nothing like tasting the ripest fruit of the tree but that involves assessment of the fruit picker. Investing in stocks is somewhat similar to this process. Doing your personal assessment and research is of key importance here. Being armed with ample knowledge is the key to success in stocks trading.
Investments based on tips
New investors often look up to their friends or someone who has been trading for a long time for stock selection. It is not uncommon for them to pick up stocks based on tips from tipsters, current affairs or news articles. It is understandable since the world of stocks is vast. New investors are often looking for roadmaps from those who have been there for a longer time. What most people fail to realize is investing cannot be learnt through tips. It is necessary to learn trade, rather than rely on tips.
Fall prey to the promises of ‘secret knowledge’
While there are many good resources that teach people how to invest and trade, there is an even greater percentage of incorrect information which is available online. Sea of incorrect information across social media and free webinars selling ‘secret knowledge’ by scamsters are common traps new investors fall into. Remember, there is no holy grail to investing or trading.
If the main barrier to investing for previous generations was lack of information, today the main barrier to earning good returns from investments, is the overload of misinformation. Finding credible sources of information is a daunting task. First-time millennial investors are barraged with tips, get-rich-quick methods, and surface-level knowledge that don’t really help them improve their financial knowledge and situation.
So, what is the way forward?
Without proper financial education and learning how the markets work, Millennials will simply be gambling in the markets. One of the most important aspects of investing (and the least talked about) is back-testing. This helps investors test their strategy on historical data and understand how the strategy will perform in the present or future market scenarios, even before investing their money. Investors should follow a back-tested investing or trading system where their stock selection, entry, stop loss and profit levels are pre-decided based on a quantitatively measured system. India has one of the largest millennial populations in the world and their growing interest in investing is a positive mark for the future. The challenge is to feed their curious mind with the right kind of education and help them understand the essence of investing.