6 Reasons Why Most People Lose Money in Stock Market
6 Reasons why most people lose money in stock market. Many a time while watching the market news you hear the words like ‘Oh, the market is bullish’, ‘Sensex went up 100 points’, ‘Nifty banks are doing great this year’ etc. Then you see your portfolio and talk to yourself ‘Why the hell am I losing money?’
Don’t worry. 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 at a 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.
So, today I am going to give you top 6 reasons why most people lose money in the stock market. Be with me for the next couple of minutes to uncover this mystery.
6 Reasons why most people lose money in stock market
1. Not doing enough research and investing based on ‘TIPS’.
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, you can argue with me that what’s wrong with taking tips and suggestion. Your friends and the brokerage firm has more experience than you and surely can help you in getting good returns. But if you think like that, then you are missing the point. 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. They don’t care whether you win or lose. They are getting their 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. And the more you trade, the more brokerage fee they will 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 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. Trying to make money quickly
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 ‘Warren Buffett’ – Rich and Powerful. However, what they don’t understand is that Mr Warren Buffett has made the majority of his fortune after his 50’s. It’s a fact that he got more than 90 percent of his wealth after the age of 50 and has accumulated a large sum through his long-term investments for a period of over 5 decades. Success in stock market needs time and patience.
But this is not how the people invest. They enter the market. Then select a stock which they heard on 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 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 loses money in the market.
If you want to read, I will highly reccomend you to read the book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. This is my favourite book on stock market.
3. Sudden overexposure 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 neighbour has doubled his money by investing in the stock market. Suddenly he also gets interested in share market. He started thinking that if his neighbor who is a Salesman, can get so many 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.
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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 a little prepared.
In addition, non-diversification is also one of the biggest mistakes that most people do. People 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.
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? 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, this is the wrong approach. 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 lever. This can be achieved by holding to your winners and cutting your loser stocks.
5. 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 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 neighbour 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 for their investment. You just can’t read the exit strategy of your neighbour. Maybe when you thought to buy, he was planning to sell the stock in a 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.
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.
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Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting