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.
6 Reasons Why Most people lose money in 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 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, practice, 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 has 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 chose 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 share market.
He started thinking that if his neighbor can make 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 here is that you can enter 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? 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 loser 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 profits 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 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 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 only they would have held these stocks for a couple of years, they could have got good returns. Here, the lack of patience misfires on their intelligence of choosing a good stock.
6. Blindly Following the Crowd.
This is the sixth and most dangerous reason why people lose money in stock market. BLINDLY FOLLOWING THE CROWD.
Imagine a scenario. Your neighbour bought a stock which increased its value by 40% in 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 to read about the company’s fundamentals, its financials and figure out why is it in 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 FOLLOWING THE CROWD.
BONUS: Non Diversification
In addition, to the above reasons of 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 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!
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