Ways to lose money in the Stock Market
Warren Buffet once famously said that an investor must follow two rules. Rule number 1 – Never lose money in the stock market and rule number 2 – never forget rule number 1.
People in the stock market who take maximum risks are usually the ones who want to make a large amount of money from it really quickly! And instead of making money they end up losing all of their money.
Investing in the stock market is probably one of the best, quickest and effortless ways to make money.
The good news is you can become crazy rich by investing as low as a few thousand rupees a month over the course of time.
The bad news is most people fail at investing and they fail big.
Even highly knowledgeable investors fail, due to the reasons I’ve mentioned in this article.
Much the same as some doctors who can’t quit smoking or overeating, even though they know what’s good and bad for their health. Many experienced and knowledgeable stock market investors can’t resist the urge to speculate, get greedy as well as feel fearful when markets are crashing.
So, always remember that Investing isn’t one of those get rich quick tactic that you can do for a brief period and expect to make a significant amount of money.
Just remember that short term investment is always riskier than long term investment.
Because Investments held for the long term tend to exhibit lower volatility than those held for shorter periods. The longer the period, the more likely you will be able to weather low market periods.
Assets such as stocks that have higher short-term volatility risk tend to have higher returns over the long term than less volatile assets such as money markets.
It’s usually very difficult and risky to time the market. Many people panic when they see a report that shows a fall in the stock market.
However, staying invested in the market over a long period of time has historically paid off. The short-term fluctuations seem random; the stock market tends to reflect the overall growth and productivity of the economy in the long run.
But, it doesn’t mean short-term investments are bad the key is to find the right balance for you and your individual situation. Before investing your money, whether it’s short or long-term investing, an investor must have clear goals in mind.
Even if you are most interested in short-term investments, I would suggest you set aside a portion of your money for long-term investments. This will protect you in case of a sudden market crash or a bad investment.
In greed to make a quick buck from the market, usually, retail investors tend to overlook the fundamentals of the company they’re planning to invest in and this becomes a huge factor to lose money in the stock market.
Some investors buy shares without spending time to gather basic information about the company profile, what product or service that the company sells, or what could be the future for that business.
These investors are those who get carried away by a management’s overoptimistic speech, their tentative expansion plans.
They never want to miss the current surge in the price of the stock because they are always biased towards short-term play.
Investors should look at companies that have consistently delivered earnings growth and good corporate governance and focus on growth and value investing. One should invest in a firm without understanding the dynamics of the business.
An investor, who follows the growth-investing approach of fundamental analysis focuses on finding companies, which have a sustainable business advantage.
And this sustainable business advantage can last for decades so that they need not shift out of the stock of a company every few days. These types of investors think like the owner of the company, an entrepreneur and remain invested in it for at least 3-5 years if not decades.
Putting All Your Eggs In One Basket
No matter how big a company may seem or how safe a particular stock may appear on the surface technically, investing all of your money in a single company can be a very risky endeavour.
The goal here is to reduce risk. The logic is quite simple.
If you invest in multiple stocks that do not move at the same pace, same direction and at the same time, then you can considerably reduce your chances of losing all your money at once.
It’s not just small biotechnology companies or startups that go bankrupt. Big companies also go bankrupt due to improper management, unclear vision and bad asset management.
By Investing in a low-cost index fund for long-term one can avoid the possibility of a cataclysmic company meltdown or a single accounting fraud which can cost their entire investment. The Index funds are ideal for those investors who are risk-averse and they want predictable returns.
Check the index funds in India – HERE
Remember, you shouldn’t also buy shares of a large number of companies at once, a beginner stock investor, sometimes buys shares instinctively by following the advice, tip or rumours given on TV and newspaper or by his broker otherwise you may lose a lot of money in the stock market.
On the surface, the day trading looks like it should be very easy to do.
Buy and sell shares as the price moves, make a little profit and repeat the process tomorrow. Unfortunately, there are many dangers that are lurking in the markets for day traders and most traders are unaware of these dangers and ultimately drain their trading account.
New traders are usually optimistic about their trading skill and overlook important risk management strategies.
Another hidden danger you’ll face as a day trader is yourself. Day trading can be very stressful, possibly infuriating, and will tax your mind in ways you didn’t think it could.
The day traders never know which direction the stock will go up or down.
They hope that it will move in one specific direction, be it up or down.
The bonafide day traders don’t keep any stocks overnight due to the risk that prices will alter in a considerably from one day to the next which could lead to huge losses for them. So it’s safe to say that day trading can be very unstable and nerve-wracking to partake of.
Not Focusing On Asset Allocation
One of the most sensible ways of investing is to follow a proper asset allocation strategy.
Asset allocation is an investment strategy that aims to balance risk and reward by allocating a portfolio’s asset based on our goals, risk tolerance and investment horizon.
Investors need to understand that risk and return work in tandem. Generally, a high risk-taking investor needs higher compensation in the form of returns.
For goals over a shorter time frame, debt products like debt mutual funds or fixed income instruments should be preferred over equity, as equity is a volatile asset class and generally deliver best over larger time frames.
If an investor has longer time frames for achieving goals along with a decent risk appetite, than equity as an asset can deliver inflation-beating risk-adjusted returns.
Buy High, Sell Low
The stock market always reacts to news, and share prices rise or fall with respect to it.
Ideally, we can say that the price of a share should be proportional to the total capital and earnings prospects of the company.
However, market madness results in shares being, generally, overpriced or underpriced.
In a bullish market, investors often buy the overpriced shares just because everyone else is buying and they become so optimistic that they expect stock prices to continue rising. This happens sometimes and doesn’t happen most of the times.
On the other hand, in a bearish market, some investors become so pessimistic they tend to sell shares when they should buy instead.
One must always remember that the stock markets tend to take wild turns in the short run but behave rationally in the long term.
The most successful investors around the world always base their investment decisions on share’s intrinsic value and they constantly hunt for bargain stocks.
They will buy shares of a company with strong fundamentals when it’s beaten in the market due to some negative sentiments and sell when prices surge.
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Not Ready to Book Losses
Investors quickly cash out small profits on their investments, but they are often not ready to book losses on stocks that are sinking.
When the stock prices keep declining, they continue to hold for longer periods in the hope that the stock will bounce back and turn profitable eventually. If this doesn’t happen, it often results in bigger losses for the investor.
When stock prices are on the decline, some of them buy more shares in an attempt to reduce the average cost of their stock portfolio.
Buying on dips is not bad, but one should only do that when the decline is due to a temporary setback caused by some reaction to the news and growth prospects remain positive.
An investor should also set a stop-loss instruction for it before trading. If the price of a stock falls to the stop-loss level, the losing trade would automatically get closed.
If you set a stop-loss order at 20% below your purchasing cost, your loss will be limited to 20%
Sometimes it’s necessary to book losses and lose money in the stock market in order to make money in the future.
Thanks to Email and bulk messages, you might have received emails and SMSs occasionally tipping you about a ‘golden opportunity’ to earn huge profits.
If you act on any of these tips, you’ll probably lose some money. If you haven’t, you’ve just saved yourself from such unsolicited mails and messages.
Several studies in the field of behavioural finance show that peers such as friends and family can influence our stock market participation and asset-buying decisions due to the fact that money matters are very personal and people tend to rely on close friends or relatives for advice regarding saving and investments and follow blindly on their tips.
It’s also dangerous to follow our gut instincts while investing these instincts often lead investors down the wrong path.
You must know that there’s a long list of cognitive biases that every investor must overcome, including confirmation bias, representativeness bias and anchoring bias.
Investing On Margin
With margin trading, you can buy shares despite not having enough funds to afford the same by borrowing the funds from your broker. You can look at it as a loan from your brokerage. This is done by paying a margin, which is a small part of the total value of the shares bought.
While it may seem like an easy way to increase your investment returns, one has to very careful as margin investing can quickly turn into a nightmare for an investor.
Most brokerages will allow customers to borrow up to 100% of their cash balance, meaning someone with Rs10,000 in their account can buy Rs20,000 of stock.
Of course, that stock would only need to decline by 50% for the investor to lose all of his or her original Rs10,000. In addition, interest on that borrowed money will eat into returns over time if not paid on time.
Even the best long-term investors will pick a bad stock occasionally and lose large amount money, but investors like warren buffet sell their shares after booking huge profit and common investors sell their shares at 10% gain.
Setting up a target price is also very important for each share and you should sell that share at that target price without taking any risk or in greed. Most people lose their money in the greed of booking massive returns.
Fortunately, well-disciplined and patient investors can overcome these mistakes and can make excellent investment returns in the long run and rarely lose money in the stock market.
Learning from mistakes and reading experiences of great investors is part of becoming skilled in any part of life. Your reading habit plays a huge role in whether you’ll a successful investor or an unsuccessful one.
Because the stock market could be a dangerous place for investors who don’t know what they’re doing, have no target in mind, who trade on tips, doesn’t use stop loss and in the game to get rich quick.