Hey Readers, it has been a long time since my last post. Now here comes an interesting topic. Today I am going to discuss why most people lose money in the stock market. Let’s get started.
There are many reasons because of which people blow up their bank accounts in stock markets. Below I mentioned a few
1. Without Proper Knowledge
There are many who enters into markets without proper knowledge and makes huge losses. In the end, they exit by blaming the stock market as a game of gamblers.
To be successful in any profession one has to acquire the right knowledge. The stock market is no different, the same applies here too. Making a career in the markets is not an easy task. I will explain this with a simple example – To acquire a bachelors degree in engineering it takes around 3-4 years of study. In this competitive world, even after getting a degree there is no guarantee of getting a job. So how can you expect of making a successful career in the stock market which is one of the highest paying profession without proper knowledge?
There are some very good books in the markets. Read and understand them. Get a good mentor. Practice Virtual trading before involving your hard-earned money.
2. Investing without Research and Following Tips
Mostly Newbies are the one who gets into the trap of tipsters. Here is the simple logic if the tipsters can make you rich with their investment or trading tips why they are not using those for themselves and why they are trying to sell those tips to you for a few thousand bucks. Think once. Don’t make a fool out of yourself by believing these tips. They try to sell the tips to make money from you either directly or through brokerage, they get when you buy those shares.
No one cares about your money. Everyone tries to take it from you. You have to do your own research before investing because it is your hard-earned money. If you are new to investing learn fundamental analysis. If you want to become a trader learn Technical Analysis. To make best out of market learn both.
3. Following the Herd and Wrong Timing
The Stock market is all about buying and selling. But the point here is to make a profit you need to buy low and sell high. It is easy to say
“ Buy Low and Sell High”. But in practice, it is not easy as said.
To make profits you need timing. If you buy the stock which you heard about on T.V or through your friends or family then most likely you will end up in loss. The main reason here is by the time you buy the stock, the price would have already gone up. The smart money (Institutional Investors) has already exited it. There is a high chance of price drop as soon as the retailer (like you) buys.
In stock markets “Bulls make money, bears make money and pigs get slaughtered”. Don’t be a pig.
You need to enter into a stock when it is cheap. Here cheap means in terms of pricing but not in quality. To do so you need to do your own research and there are thousands of companies in the market. Find the one with good quality and less pricing. This is called Value Investing. I am providing a link here – Learning Zone. Click it to find articles regarding the company and industry analysis. Do not follow the herd. Be a lonely wolf. Do your own research.
4. Trying to Catch Falling Knife
The Big mistake many retail traders and investors do is timing the markets. Don’t do it. No one knows where the market will go. We need to follow the market trend. Make the trend as your friend.
If the market is in a downtrend for many days, here is how retailers think – “the market has fallen a lot I think now it will bounce back so I will buy it”. Here they are going against the trend. They buy by considering small pullbacks as a trend reversal. But as soon as they buy the market again it goes diving downwards which is its original trend bringing loss to retailers.
So, never try to catch falling knives it hurts more and results in bringing more losses.
5. Entering in the Wrong Phase
Markets go through different phases. If you invest in a bearish phase of the market then you are most likely to go into loss. Understand the market cycles. Investors can make money when the market is a bullish phase but not in bearish or range-bound cases. Study the nature of the market before investing
6. Exiting Profits Early and letting Losses Run Long
This is one of the biggest problems even with experienced investors and traders. To solve this problem one has to work with his/her psychology. The problem-solving psychology that works in the real world doesn’t work here.
In real life, if you go through problems with your partner you will do whatever you can do to hold it back. But in the market, if the stock of any company goes below the price you bought and breaks some crucial price levels then all you have to do it exit that stock so that at least you will get the remaining money. Invest that money in the profitable stocks of your portfolio. But the retail investors do quite opposite, they will let the loss-making stocks run and exit the profit-making one.
These are some of the reasons why people lose money in the stock market.