Traders often go through periodic up and down phases in stock market, but if it occurs on a frequent basis, they should introspect and try to find out the reason for the same. It may so happen that they might ride on beginner’s luck at the start of their trading career, but soon law of average will likely kick in and if they are not disciplined, they may lose quite a lot of money. In such scenarios, instead of getting depressed or cursing the market, traders should spend time in figuring out their weaknesses, improve their knowledge and become more disciplined.
Many people consider trading stocks to be the simplest way of making money but it often comes out be the easiest and fastest way of losing money.
Also, often you might have heard an analyst discussing on news channels that market is making new highs but you may wonder that your portfolio is not performing the same and rather end up in losses.
Today you will get to understand the 5 important reasons why most traders lose money while trading stocks
1. Aiming to earn ‘Quick Money
This is the biggest mistake which most people often commit in stock market. Everybody wants to get rich quickly with minimal effort in trading stocks. They want to be powerful like Warren Buffet but one thing they are unaware of is that the majority of his fortune was made after he turned 50. This suggests that you need to be patient with long term commitments in order to be successful in market. Getting rich from the market by investing in shares is a long term process just like growing a sustainable and good business over time.
But, this is not how people put money in market. They are always looking for stocks which give them quick gains and once they get to know such stock on any news channel, they invest heavily into it. Instead of becoming 5-6 folds, such stocks often end into correction, wiping 30-40% of their capital. They will ultimately quit the market out of frustration and start looking for other modes to become rich quickly. This is the story of most non achievers in markets who end up wiping out their money in trading stocks. The only way you can be successful in market is when you are disciplined and aim for descent return. You have to be pragmatic but patient while investing in shares.
2. Did not diversify the investments-Putting all eggs in same basket
Non-diversification is also one of the biggest mistakes that most people commit. Often investors are so confident about their investment in share that they invest all of their capital in one or just a few stocks. This kind of strategy can be successful only when one’s stock selection methodology is absolutely phenomenal or one is extremely lucky, but, to assume either of them beforehand means the trader/investor is either extremely over-confident or gambling instead of trading stocks or investing. Diversification helps to reduce risk of portfolio while investing in shares. Remember, it’s always about minimizing risk and maximizing the profits. However, over-diversification minimizes the profits, in the same way; non-diversification maximizes the risk.
“Diversification is an established tenet of conservative investment” – Benjamin Graham
3. Herd mentality – very common among investors
Herd mentality implies the tendency for people’s behaviour or beliefs to conform to those of the group to which they belong.
The general masses always have a tendency to blindly follow the crowd and this is the reason they end up making losses in the market.
Imagine a scenario. Your neighbour bought a stock which increased its value by 50% in few days. Then your 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 shares. 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 investing in shares. 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 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.
4. Being unaware of market dynamics and economic news flows
With companies going global, any instability in politics, security, and demography will affect the market sentiments throughout the world. These lead to market corrections. However, as we can see that all incidents do not lead to a market decline in others countries around the world. The people many a times overreact to these incidents without logical analysis of the outcome. For example, the day Brexit referendum was to be declared, the stock market of many countries including India saw sizeable decline. However, the next day the indices became normal without much drop in stock price. The reason being, it was a vote for Brexit and market normally gets over these kind of news over a period of times, especially when the global liquidity is so high. Also, regime changes in unstable countries, commodity price rise or decline alters the mood of the market. Hence it is of utmost importance for a trader/investor to offer his/her ear to the information flow of market.
5. Market may defy logical directions for some periods
Market does not always react the same way what a logical mind would expect. The market often reacts irrationally, just to push out weaker hands out of the market. As famous economist John Maynard Keynes said
“The market can remain irrational longer than you can remain solvent.”
Hence it is important to appreciate the sheer force of market and book loosing positions early so that they do not inflict sizeable damage to our accounts.
Trading and investing in shares is just like any other full-time business which requires patience, hard work, smartness and planning. In the process to make money, one has to take risks and it is quite natural that some of the risks to not pay off, like it happens in the cases of other business too. One should be practical that it is impossible to make money out of every trade, while our aim is to make money out of all the trades/ investments we make. However, if you notice that your frequency and size of losses are higher than frequency and the quantum of profits, it’s time for you to introspect and make some changes. By making simple changes in your habits and in the way that you approach your work, you can begin to reduce your losses in a big way and start building your account by trading stocks.
If you want to the learn the concepts followed by serious market players, attend our workshops.