Top Reasons why most people lose money in Stock Market: Many a time while watching the market actions you can notice that a lot of common stocks have gone up and market indexes are trading high. You can hear the market analysts saying that ‘The market is bullish’, ‘Sensex went up 500 points today’, ‘Nifty has given amazing returns this year’, etc. However, when you see your own portfolio, you talk to yourself “Why the hell am I losing money?”
Don’t worry. You’re not the only one facing this issue. 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 going down when the entire market is moving upward? Why most of the stocks you’ve bought are not performing? If you’re having all these thoughts, then this post is for you.
Today, we are going to discuss the top 6 reasons why most people lose money in the stock market. Be with me for the next couple of minutes as this post can be life-changing for the stock market beginners. Keep reading.
Table of Contents
6 Reasons Why Most people lose money in the Stock Market
Here are the most common reasons why people lose money in the stock market and not able to make consistent returns, though others are able to ace it:
1. Investing Based on ‘FREE TIPS’ & Not Doing Proper Research
This is the biggest mistake that most people commit when they start investing in the stock market. They easily trust the tips they hear from a friend, neighbor, colleague, brokerage firm, or any financial channel that they just watched. Moreover, most people blindly trust these recommendations which later turn out to be a major loss on their investment.
Now, you can argue with me that what’s wrong with investing based on tips and suggestions. Your friends or the brokers have more experience than you and surely can help you in getting higher returns.
But you are missing the point. No one else cares about your money more than you do. They don’t care whether you make money or lose. It’s not their money.
Next, you can easily rule out the broker’s recommendations or advisory as there is a conflict of interest here. Brokers will only make money when you trade. They don’t care whether you win or lose. They are getting their brokerage fee as long as you are consistently buying or selling. Hence, they will always try to give you recommendations so that you can trade more frequently. And the more you trade, the more brokerage earnings they will make.
Now, let’s come to the suggestions from friends and colleagues. There are a few things that a beginner should understand that no one else is going to tell them. All your friends will always boast about their profits & returns. This is known as Survivorship bias. You can read more about this bias here.
None of your investor friends will tell you about their losses and bad investments. It’s sometimes a matter of pride. You might think that your friends or colleagues are an expert, but they are not.
The only way to make consistent returns from the stock market for common investors is DIY (Do it yourself) investing. Always research properly before investing. If you don’t have enough skills, learn! Stock market investing is not rocket science. Finding an undervalued stock that can give you good returns is an art that you can develop by reading, practicing, and patience.
2. Trying to Make Money Quickly
This is the second biggest mistake that people make while investing in the 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 investing takes time to make money. Even Mr. Warren Buffett has made the majority of his fortune after investing in stocks for decades.
It’s a fact that Warren Buffet made more than 90 percent of his wealth after the age of 50 and accumulated a large sum through his long-term investments for a period of over five decades. Success in the stock market needs time and patience.
But this is not how beginners invest. They enter the market and want to double their money in two months, even though they are not ready to spend any time researching or learning. They select a stock that they hear on a financial news channel that ‘This stock is going to be next Apple/Microsoft’ and they invest heavily in it and pray that their money will double.
However, it turns out to be a 50-60% loss in their investment. Next, out of frustration, they quit investing in stocks and start searching for another way that can make them rich quickly.
This is how a loser in the stock market thinks and loses money in the market. Nonetheless, if they had kept a realistic expectation (12-20% annual returns) from the stock market and patiently done the research, and chosen the right stocks, they could have won too.
3. Sudden Overexposure to Market
This happens a lot of times 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 the stock market. Suddenly he also gets interested in the share market.
He started thinking that if his neighbor can make 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. And this is where he fails.
The point here is that you can enter the stock market whenever you want; it’s an open market. However, to enter the market without being prepared is totally stupid. Think of jumping into 20 feet deep water without knowing how to swim. You need to develop the skill first. You need to understand the market, learn the art of investing and enter once you are at least a little prepared, even then start small.
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? Which stocks will you sell first? Are the shares that are doing great or the ones that are underperforming?
‘Sell the winners and hold on to the loser stocks’. The majority of beginner investors follow this rule. They think that it is safe to sell the winning stocks first and book some profits and hold the losing stocks. This way, the losing stocks will get time to recover and they will get their initial investment back.
However, this is the wrong approach. Here, you are limiting your upper-profit level while increasing your downside risk. In other words, you are limiting how much profit you can make as you are selling your winning stocks. You are ready to book profit at a mere 20-30% when these stocks can even go up and give you 200-300% returns. However, here you can suffer even greater loss as the losing 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 sell your non-performing ‘fundamentally weak’ stocks if they are not performing even after giving sufficient time. 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 the stock market. However, most people who lose money in the stock market do not have patience. Although many times, beginners are able to find good stocks, they aren’t able to get good profits from them. Why? Because they don’t have patience. They can’t even wait 1-2 years and give time for 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 their worth, they become highly impatient and sell their stock quickly. If only they would have held these stocks for a couple of years, they could have got good returns. Here, the lack of patience misfires in their intelligence in choosing a good stock.
6. Blindly Following the Crowd.
This is the sixth and most dangerous reason why people lose money in the stock market. BLINDLY FOLLOWING THE CROWD.
Imagine a scenario. Your neighbor bought a stock that increased its value by 40% in a few days. Then your colleague bought the same stock and the stock has now risen to around 60% 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? Will you invest in that stock too? Will you feel FOMO – fear of missing out?
This is a common scenario in the stock market, especially when a new hot IPO enters the market. If you blindly follow everyone, you are most likely to lose money. Everyone has different strategies for their investment. You just can’t know the real strategy of your neighbor or friend.
What you can do is read about the company’s fundamentals, its financials and figure out why is it in the news so much and is it worth investing in. After researching the company properly, if you are satisfied, then only invest in that stock. NEVER INVEST BLINDLY FOLLOW THE CROWD.
BONUS: Non Diversification
In addition, to the above reasons why most people lose money in the stock market, another big factor is non-diversification while investing in stocks. Most of these people are so overly confident about their stocks that they think it is logical to put the entire stake in just one company.
Remember, diversifying your portfolio with multiple stocks can mitigate the risk. True, it might reduce the profits; but it will also reduce the risk. Remember, it’s always about minimizing risk and maximizing profits.
Apart from the above, there are other couples of more reasons why most people lose money in the stock market like frequent trading, entering the derivative market without knowledge, lack of self-control, etc that are responsible for most people losing money in the stock market.
That’s all for this post on 6 Reasons why most people lose money in the stock market. We hope this article was useful to you. If you have any questions or queries, feel free to comment below. We’ll be happy to help. Further, feel free to share this post with your friends so that they can also avoid losing money in the market. Have a great day and Happy Investing!
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Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.
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Superb !!! can i get some suggestion/advice in the stock that i have and want to invest ??? if yes please let me know. Thanks in advance.
Hi Mayur. Sure, you can send me doubts at info@tradebrains.in Further, I don’t give stock advice to buy or sell. But, I can help you with the fundamentals.
Most of the beginners lose their money because they follow the same which are mentioned above as not to follow.
Good awareness.
Thanks
Its very important lesson. I also followed the wrong process and made loss. Please guide how can the checked the fundamental and financial report of a stock.
Hi Subrata. It’s okay to have few losses in the beginning. Remember- “Sometimes you win, sometimes you learn”. Here are few links which you can find useful:
https://www.tradebrains.in/how-to-select-a-stock-to-invest-in-indian-stock-market/
https://www.tradebrains.in/financial-ratio-analysis-must-know/
Thanks for such a lovely article. Going long term(Only for company with good fundamentals) is certainly the best and safest way to earn in stock market.
very nice and good information for new entrant in stock marketing
Touche. Greаt arguments. Keep up the amazing effort.
It’s actually a great and useful piece of info.
I’m glad that you simply shared this helpful information with us.
Please keep us informed like this. Thanks for sharing.
The blog is very informative and the tips are very effective. As many people believe in other people quickly not doing enquiry and then they get trapped in what people said. The tips give very clear information. My advice also doesn’t just follow the crowd or what people say, first search about the company you are investing.
You are welcome Suresh.
Very informative.
Can you help me with what research should I do before investing?
I’m completely new to the stock market.
Hi Niar. Thanks for your comment. You can find this post useful regarding your doubts: https://www.tradebrains.in/how-to-do-fundamental-analysis-on-stocks-in-india/
I have a question regarding point 4 and point 5. In the last paragraph of #4 its written to reduce loss making shares to reduce liability. And in the last paragraph of #5 it is written “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. “ I am a bit confused as they both seems quite opposite. Kindly clear my doubt. Thanks.
Hi Jatin. Thanks for your comment.
In the 5th point, it’s stated to give enough time for your stocks to grow. Don’t expect it to grow within few weeks after buying.
On the other hand, in the 4th point, its stated to cut your stocks if its continuously performing poor even if you have given it enough time say 2-3 years. It might never return you even the investment amount and there is no point to hold it for long and lose more. I hope this is helpful.
I love your article. My personal suggestion to everyone entering the market is study minimum fundamental and technical analysis from good mentor. Then put 10k in market to practice all the things u learned and once you understand the working techniques and research process then start little higher investments.
Never enter in to futures and options with the proper experience in equity stocks
Stock market is very interesting and make more money of the Indian market bse and nse very awesome and I am very interested in stock market so please sir help me few guidelines
Hi Satyam. Glad you are interested in learning. Join my FREE 7-day eCourse on stock market here and I’ll send you the lessons directly in your mail. Happy Investing.
Hi Kritesh
Regarding factor 4 what you mention about holding onto losses…..over a long term doesn’t it turn favourable depending on performance of the company? May be in the short term one may suffer losses
Dear Mr. Murali, it’s always good to cut down your underperforming (loser) stocks if they do not have good future prospects. However, definitely, we need to cross-check before coming to any conclusion.
Hi Kritesh
Great article. Even I have the same experience. About 5 years ago when I just started stock trading I had done lots of silly mistakes. After lots of ups and downs, I’ve learned some valuable lessons and now stock trading is my second source of income.
Hi Aamir. I agree that the stock market is a long-journey and mistakes are the building stones. Thank you for your comment. Cheers!!
I really treasure your piece of work, Great post.
You are welcome, Kimball!!
Hello,Thanks for your interesting article.What does it mean by 90% people lose in stock market?Is it 90% of time they invest or It’s about the total money?
Hello sir,I want to invest in sterlite technologies ltd, vip industries ltd, minda industries ltd., larsen & toubro infotech Ltd, teamlease service Ltd.bajaj finance Ltd.reliance industries ltd, hdfc bank Ltd.for long term Monthly rs. 20000/- dividing in all equal ratio.could you suggest & give clarity. Thanks
Hi, just wanted to mention, I loved this blog post.
It was helpful. Keep on posting!
Nice article. Recently I wrote similar article on the same topic of people losing money in stock market with some info graphs added to it
Simple/easy guidance of effective stock brocking??.
Nice article. I recently wrote article similar to yours. I provide my blog link below.
I want to start business in Indian stock market with little savings. How it will be started as beginner.
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Hi Kritesh
A very good and useful blog.
With reference to point no: 4, do you think, the suggested approach would be useful while doing the swing and provisional trades.’
Regards
In stock market technical skills are very important example a car we have drive on road we should first learn driving. a car has four tries same in stock market 4 thing are very important 1) candlesticks type 2) candlesticks pattern 3) indicators and 4) time frames.
Really very informative information about stock market. I will apply all rules.
thank you for blog.
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This article provides valuable insights into why most people lose money in the stock market. Investing based on free tips without conducting proper research is a common mistake. The desire for quick gains and lack of patience often lead to poor decision-making. Additionally, blindly following the crowd can be detrimental to one’s investments. Diversification and self-control are essential to mitigate risk and maximize profits. Understanding these reasons can help beginners navigate the stock market more effectively.
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