Why people loose money in market?
5 Reasons why most people lose money in stock market.
Most people who invest in Stock markets often wonder about losing money. Well, this is not just your scenario but a known fact that about 90 per cent of people lose money in the stock market. But why is one’s portfolio at a loss even when the market is upward? Why most of the stocks one bought are underperforming? Why isn’t one able to beat the market?If you have been having all these thoughts, then you are one of those 90 per cent people, I’ve come across. And so, to help you clear the air, here are my top five reasons why most people lose money in the stock market.
- Investing based on ‘TIPS’
This is the first and foremost mistake people do when they start investing in the stock market, where they easily trust the tips given by a friend, colleague or from a financial magazine. Moreover, most people blindly follow the recommendations from their brokerage firm which quite often turn out to be a major loss on their investment.
It’s natural to take consider suggestions, keeping your friends’ and the brokerage firm’s experience in mind, hoping it surely can help you in get good returns. But if this is what you’re thinking, then you are missing the point. The fact is no one else cares about your money more than you do. You can easily rule out the broker’s recommendations as they will only earn when you trade, despite the win or lose. The firm gets the brokerage fee as long as you are buying or selling. Hence, they will always try to give you suggestions so that you can trade more and frequent. The more you trade, the more brokerage fee they get.
Now, let’s come to the suggestions from the friends and colleagues. There are few things that a beginner should understand that no one would tell them. Firstly, all your friends will always boast about their profit making investments & returns. Further, none of your investor friends will tell you about their losses and bad investments. It’s sometimes a matter of pride. Overall, you will think that your friends or colleagues are always doing great, but they are not. You might take their suggestion thinking that they have researched a lot about that company and they are always right in investing. However, in the end, you will end up losing your money.
Hence, the only way to invest is to learn it yourself before investing.
- Trying to make money quickly
Most people enter the market by selecting a stock which they have heard about on a news channel with a message about a growth potential, eventually investing heavily in it. Then they pray that their money becomes 5-10 times more. However, it turns out that they lost 30-40% of their investment. So, out of frustration, they quit investing in stocks and start searching for another way that can make them rich quickly. This is how the non-achiever in stock market thinks and faces loss in the market.
This is the second biggest mistake that people make while investing in stock market, where they are always in a hurry to make money. The motive to become rich quickly, and be like ‘Warren Buffet’ – Rich and Powerful. However, what they don’t understand is that Warren Buffett has made the majority of his fortune after his 50’s. It’s a fact that he got more than 90 per cent of his wealth after the age of 50 and has accumulated a large sum through his long-term investments. Success in stock market needs time and patience.
- Over-exposure and non-diversification
This happens frequently in the stock market where a common man has accumulated savings over the period. He hears about his acquaintance making money by investing in stock market, which also gets him interested. He started thinking that if his acquaintance who is a Salesman, can get such a great returns from the stock market, then why can’t he? Hence, he decides to enter the stock market with a huge amount of money that he has saved during all those years of hard working.
And this is where he fails. The point is, you don’t need huge money to make it big in the market, you can enter stock market whenever you want; however, to enter the market without studying how to invest is the root cause of failure. Think of this like going to the forest without knowing how to hunt. You need to develop the art first. You need to understand the market and enter once you are prepared.
In addition, non-diversification is also one of the biggest mistakes that most people do. They are so confident about their stocks that they think it’s illogical to invest in multiple stocks, which may average out the profits. True, it might average out the profits; but it also reduces the risk. Remember, it’s always about minimizing risk and maximizing the profits. Like over-diversification minimizes the profits, in the same way, non-diversification maximizes the risk.
- Lack of patience
Patience is the key to success in stock market. The only thing that you need to do in the stock market is to buy good stocks and give it time. This is the only way to make money here.
However, most people who lose money in the stock market do not have patience. Although many of these people are able to find a good stock, they aren’t able to get good profits from them. Why? Because they lack patience.
They can’t even give 2-3 years’ time to their stocks to grow. They want a quick result. However, this is not the only problem with such investors. In some situations, when their stocks lose 20-30 per cent of its worth, they become highly impatient and sell their stock quickly. If just they have held their stocks for a couple of months, they could have got good returns of around 40-50 per cent on their investments. Here, the lack of patience misfires on their intelligence of choosing a decent stock.
- Holding onto losses while booking profits early
Let us imagine a scenario. You have bought shares of 5 companies. Three companies are doing great while two of them are underperforming. What will you do? What will you sell first? The shares that are doing great or the one who is defeating?
‘Sell the winners and hand on to the loser stocks’. The majority of the amateur investors follow this rule. They think that it’s safe to sell the stocks first which are giving them good profits and hold the loser stocks. In this way, the loser stocks will get time to recover and they might get their initial investment back. Moreover, in the meantime, they can get some profits by selling their good stocks.
However, that’s not correct. In this way, you are limiting your upper level and increasing your lower level. That is, you are limiting how much you can get profits as you have already sold your good stocks. But, you can suffer even great loss as the loser stocks are still in your portfolio.
If you want not to lose money in the stock market, then you should use the opposite approach. You should limit your lower level and maximize your upper level.
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