Stock market investors sometimes complain about stock market coming down and their inability to control this shortcomings. This is not just your scenario. It is a known fact that about 90% of people lose money in the stock market. But do you know why? Why your portfolio is in loss when the market is upward, why most of the stocks you bought are underperforming; why aren’t you able to beat the market? If you go through all these thoughts, then you are one of those 90% people.
Here are 6 reasons why most people loose money in stock market.
1. Failure to make research before investing
This is the first and the biggest mistake that people do when they start investing in the stock market. They easily trust the tips they hear from a friend, colleague or from a financial magazine that they just read. Moreover, most people blindly follow the recommendations from their brokerage firm which later turn out to be a major loss on their investment.
Now, let’s come to the suggestions from the friends and colleagues. There are few things that a beginner should understand that no one is going to tell them. First, All your friends will always boast about their profits & returns. Second, 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 intelligently is by doing enough research before investing. Moreover, it’s not tough to research the company on your own. Finding an undervalued stock is an art which you can develop with practice and patience.
2. Too much hurry to make money
This is the second biggest mistake that people make while investing in stock market. People are always in a hurry to make money. They always want to become rich quickly. Always want to be like Bill Gates overnight.
But this is not how the people invest. They enter the market. Then select a stock which they heard from a news channel that ‘It has a huge growth potential’ and they invest heavily in it. Then they pray that their money becomes 5-10 times. However, it turns out that they lose 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 loosers in stock market think and lose money in the market.
3. Sudden over exposure to market and non-diversification
This happens a lot of time in the stock market. A common person has accumulated a lot of savings over the period. Then he hears how his neighbor has doubled his money by investing in stock market. Suddenly he also gets interested in share market. He started thinking that if his neighbour who is a Salesman, can get so much 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 can enter stock market whenever you want; however, to enter the market without prepared it totally stupid. 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 at least little prepared.
4. Holding onto losses while booking profits early
Let us imagine a scenario. You have bought 5 shares. Three of them are doing great while two of them are underperforming. What will you do? 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, this is the wrong approach. By this way, you are limiting your upper level and increasing your lower level. That it, 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 lever. This can be achieved by holding to your winners and cutting your loser stocks.
Patience is the key to success in stock market. The only thing that you need to do in 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 don’t have 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% 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% on their investments. Here, the lack of patience misfires on their intelligence of choosing a decent stock.
6. Blindly following the crowd.
This is the last reason that I want to mention that why people lose money in stock market. BLINDLY FOLLOWING THE CROWD.
Imagine a scenario. Your neighbor bought a stock which increased its value by 50% in few days. Then you colleague bought the same stock and the stock has now risen to around 80% appreciation from its initial value. Everyone is talking about that stock and it’s making a lot of noise in the news. What will you do now? All your known people are getting great returns by investing in that stock. Will you invest in that stock too?
If you blindly follow everyone and buy that stock, then you are most likely to lose money. Everyone has some plans and strategies about their investment. You just can’t read the exit strategy of your neighbor. Maybe when you thought to buy, he was planning to sell the stock in few days thinking it as overpriced. But you just can’t know this.
What you can do is to read about the company’s fundamentals, its financial reports and figuring out why is it in news so much. And after studying the company completely, if you are satisfied, then only invest in that stock. NEVER INVEST BLINDLY FOLLOWING THE CROWD.
Apart from the above, there are other couples of reasons also like investing in futures and options, frequent trading, lack of self-control etc that are responsible for most people losing money in stock market.
I hope this post about ‘6 Reasons why most people lose money in stock market’ is useful for the readers. If you have any suggestions or reviews, feel free to comment below. I will be happy to reply.
Besides, here is an infographic on why most people lose money in stock market. Feel free to share it with your friends so that they can also avoid loss in the market.