One of my dad’s friend had a very sad and painful tale to narrate about his experience in Stock Market trade. He had become a bankrupt and was burdened with debt. Such incidents are common and often heard of how men and women had lost all their savings. Many traders even had borrowed to buy stock they thought will make them millionaires overnight but were now under heavy loan debt they hardly can pay now.
But everything has a reason and so why is the reason that some people tend to lose their hard earned money in stock market. The main cause is that people who trade in stocks are ignorant of this business going on behind the stock. There are many layman like me who need many finance and trade exercise to understand the game of stock. We lack the ‘financial intelligence’ to understand, analyze and buy businesses. It is like to drive a car in speed in a crowded area without proper driving and traffic management skills and then crash with an accident due to lack of proper driving knowledge.
Same do the investors that rush in public and enter the market to become rich but crash and lose all hard earned money. Because of ignorance, fear and greed people get motivated in buying a stock when the price is too high and selling it when the price is too low, resulting in a loss. Let us therefore see the 8 genuine reasons why some people lose money in stock market.
1. Do not know about stock market
As said above most of you do not really know what stock market is and how it works. You believe in what other people say and with few trading tips that you gather from here and there that is unreliable sources you enter the stock market and lose
To have success in stock market you need to know the real potential of the company you plan to invest in, the key trends affecting that stock, and the micro and macroeconomic outlook for that sector. Also you should follow and look into research reports and market analysis presented by credible sources before entering into trade.
2. Thinking Stock Market as a game of chance
Do you think stock markets as a lottery or game of chance. Most of you will say yes. But stock markets don’t really follow the ‘high risk, high return’ philosophy. Investing without fully understanding the implications of the risk is as good as gambling. Earning real gains means leveraging reliable market knowledge and taking calculated risks.
You need to know that when you buy a stock, you are actually buying a share, an ownership, in an ongoing business. Instead, most people treat stocks like lottery tickets, buying and selling based on predictions of whether the price will go up or down in the short term. Because stock prices go up and down randomly and erratically based on world events, there is no way anyone can make a guess work and that is why in the long term, the average stock player loses money.
3. Traders are impatient
Well being impatient is what is seen and read on the faces of traders as you can see them on the Stock Market TV screens. Being calm on the other hand and analyzing your portfolio when the market is crashing is always better than making a hasty decision or following the herd. Being patient allows you to know the implications and make a strategic investment plan.
4. Not analyzing whether to investing or not to invest in Blue Chip Stocks
It is a common belief amongst investors that investing in “blue chip” stocks is a sure-shot way to build your wealth, but that isn’t always the case. Blue chip companies have diversified interests, proven business models and robust management practices.
Their risks are generally spread across business lines, brands, product lines and geographies. Investing in such a scrip, for a long-term, is a sound strategy which may help you earn some good returns out of your investments. But look for low interest rates, falling dollar and strong economic headwind when buying stock of these companies like Westfield Corp Ltd, Computershare Limited, Coca-Cola Amatil Ltd and ResMed Inc.
5. Diversifying the stocks but not doing in controlled manner
People lose money on stocks by putting too many eggs in one basket. Diversification is a what many investor experts keep telling you to not to put all your money into one or two stocks. While diversifying your stock portfolio is advantageous, over doing it increases your risk. According to Modern Portfolio Theory the benefits of portfolio diversification reduces when it has more than 20 securities. So that means diversification alone, however, isn’t enough to make sure you won’t lose money.
You can also lose by not allocating or dividing stock purchases up so your portfolio includes stocks in differing industries, differing company sizes or capitalization – small-, mid- and large-cap stocks — and differing geographic locations.
6. Lack of a solid plan to trade and not in discipline
Main reason also to lose in stock market for most is lack of a systematic solid plan to trade in stock market. It is like running a horse without a goal. Lack of planning includes willy-nilly, intermittent investing rather than using dollar-cost averaging.
So following a systematic investment plan helps you set your goals and determine your financial flexibility. Once you achieve the predetermined returns, book your profits, also applicable in case of restructuring your investments. Establish an investment strategy that includes rules for when to get in and out of the stock market.
7. Jumping in panic trading
Many people trading in stocks also are doing what can be called as panic trading. It is true that stock investments can be risky, and some people handle risk better than others. Investing in stocks requires the ability to see into the future and close your eyes to short-term market dips.
If market dips cause you sleepless nights and create an overwhelming urge to sell, you’ll not only lose money you could have made, but you just might also lose the money you originally invested. Instead of jumping in panic when you lose because of lack of the above mentioned factors it is good to find some other easy trade and invest your money with minimum risk without any panic.
8. Not narrowing your stock to only the best
Most people do not narrow their stock to best. It means that they do not research and know about the ongoing market trend. They are more reliable on subjective research. Search online the top 10 best stock markets to invest and use the professional quantitative services rather than your subjective research, screen stocks, online ideas or anything less rigorous than quantitative mathematical investing.
Do not try to reinvent the wheel. Base your investment decisions on a base of other people’s research. Once you have a small set of stocks that are likely to be top performers based on years of quantitative methods and testing, then knock yourself out. Dollar cost average, trade the stocks, buy, sell, leverage, use trading software, research management, use your intuition, go with companies that you like and products you buy.
Whatever your personal style of stock trading, use it, but first narrow it to the best of the best. Use respected quantitative research that has been rigorously tested. Like many times the market as a whole is in a downward trend.
It is trading below the 12 month moving average and the 12 month moving average trend on the S&P is down and you are buying because you feel the market should reverse. Wrong. If the market is trending down, stay out until there are more positive signals. Therefore never trade if the market is in a strong downward long term trend.
Also remember when its a bull market everyone is a genius, day trader and market wizard. When there is bear market, everyone is losing, except the people who are out until the trend reverses. Do not evaluate your performance as a stock market trader until you have experienced both bull and bear markets.
So remember you have to be an expert before venturing into stock market trading. You need to be flexible, patience and a good analyses and researcher. Subscribe to a good website that will guide you into such trade and research for you the best market in trading stocks. When you are fully prepared you can then think of buying stocks and start to trade.
While the above points are critical, consulting a financial advisor is always a great option. With their professional insights, they can put together a robust portfolio and suggest a well-thought trading plan that helps you make the most of your investments.