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Stock-market is considered as a money-making machine among us where many people earned a lot of money. But there is also a dark side of this market. Most people lost their entire wealth in this same market, where few are making their fortune.
Many times it happens that after purchasing a share of a company the price of that share falls. Some investors lose money even market is doing great. Many a time when you heard that Sensex jump 200 points, market is doing great but your stocks are falling.
According to a popular estimate, as much as 90% of investors lose their money in the stock market. Forget about any profit, they lose their initial investment.
There are multiple reasons why investors lose money. Let’s take a detailed look at some of the top reasons.
(I) Investing in the stock market on the basis of TIPS
Many times people enter into stock-market just because his friends, relatives or colleague are investing in the market. He takes tips or suggestions from these people and invests his money in stock without doing much research. Apart from that, investors regularly get many investment tips from brokers, news channels, friends and relatives. Many investors especially new investors start following these tips and invest money in these stocks without knowing that the person who is giving tips also depends on someone’s other tips.
In today’s digital world we can get a lot of information about the stock market from social media, a news channel. But there is no surety of this information. When we switch to News channels many experts give investment advice, give buy or sell recommendations. All these create a dangerous trap for innocent investors who often mistake this constant flow of stock tips as genuine and invest based on it without understanding the reality.
Investing in tips and not doing enough research is the biggest reason that so many people lose money in the stock market. Many investors invest their money just by following tips without knowing anything about that company and lose money.
I am not saying that you can’t take tips from any person but before investing your money, you must do your research. It may be possible that you lose your money even after doing so much research but after research, you will learn a lot of things which you might not learn if you invested your money based on tips. And to gain success in stock-market you have to learn every day.
(II) Lack of Patience
Patience is the key to success in every part of life and stock-market is not different from that. The only things you can do is to buy quality stock and give it time to grow.
Stock Market is volatile and it fluctuates on every news. Good news results in a jump in the stock market while bad news results in a fall. Investor needs to believe in their investment decisions because this news affects share price in the short term only. In the long term those companies whose business fundamental and earning is strong will always win.
Many times investors invest in quality stocks which have strong business fundamentals but are unable to make good profit from it. They sell these stocks if they show some gain. Because of a lack of patience, they can’t give time to these stocks to grow.
In some situations, investors sell these quality stocks on the first sign of corrections, they become highly impatient which result in “BUY HIGH, SELL LOW” and what should by “BUY LOW, SELL HIGH”. If they held their stocks for some more time, they could have got good returns on their investments. Here, lack of patience misfires on their intelligence of choosing a decent stock.
“Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things take time: You can’t produce a baby in one month by getting nine women pregnant.”Warren Buffett
As you might aware of the year 2008, We witnessed one of the worst corrections in the history of stock markets. Many investors panicked and sold their investments for heavy losses as if there was no tomorrow. However, those who remained invested were rewarded immensely as the market recovered in less than 24 months.
Here are a few examples:
|Name of Company||Investment Value in 2008||Investment Value in 2019|
|Eicher Motors||1 Lac||88.82 lacs|
|Bajaj Finance||1 lacs||55 lacs|
|Maruti Suzuki||1 lacs||12.27 lacs|
|TCS||1 lacs||10.76 lacs|
|MRF||1 lacs||16.01 lacs|
|HDFC Bank||1 lacs||11.90 lacs|
|HUL||1 lacs||10.25 lacs|
|Wipro||1 lacs||5 lacs|
– source from Google
(III) Lack of Diversification or Over-Diversification
Many times investors especially new one invest only in few companies thinking that they will grow in future, so there is no need to invest money in any other company. Even after doing research, investing in a few companies is always risky. If you invest in only 1 or 2 companies, then your portfolio will be affected by the internal decision of these companies.
No one can pick the right share every time, no matter how expert you are in the stock market. Sometimes even after doing a lot of research, you will find that your investment decision was wrong. You picked the wrong share or even you pick the right share its price is not moving.
Stock-market is very risky and you have to minimise your risk. If you invest in 20 companies but out of that 10 companies are from the Automobile sector and other 10 companies are from the power sector, then also it not diversification. Any uncertainties against these sectors will wipe off your whole capital. You have to invest in different companies from different sectors so that if any company don’t perform well then your loss will cover off by the share of other company from your portfolio.
Therefore, diversification is necessary. Many investors especially new one lack diversification in their portfolio. You cannot trust any single company or any single sector. Diversification helps in the ups and downs of the economy and averaged your return.
Sometimes investors invest in many companies to reduce risk. There is no problem in investing in good companies but what is the benefit of investing in so many companies if you can’t control your portfolio. Investing in a large number of companies leads to over-diversification which reduce your return and wipe out the benefit of investing in the stock market.
Now, the question arises that what is the ideal number of companies in which you should invest?
There is not such an ideal number in stock-market. But for beginners, it is always recommended to invest in 20-25 companies so that they can control their investment. The matter is not that in how much companies you invest, the thing is that how you control your investment. If you invest in many companies, then it becomes impossible to monitor every company and it also reduces your return from your investment.
(IV) Not investing in Fundamentally Sound Business/ Blue-chip companies:
Stock-market is nothing but a platform where stocks/shares of various companies are traded. Some companies have fundamentally sound business, whereas some companies have weak fundamentals. Due to this reason, the price of their share also bifurcate.
Companies whose business fundamentals are strong and having large market capitalisation are Blue Chip Companies. These companies are relatively less sensitive to market fluctuations as compared to mid and small companies.
If you invest in the stock market, then you observed that the share price of Blue Chip Companies is higher than any other company. These blue-chip companies have sound business fundamentals, transparent management and high growth of earning. These companies also get affected by the news, emotions in the short term but long term these companies recover and give good returns to their investors.
Related: 6 Reason to start investing early
(V) Investing in Penny Stocks
As the name suggests, penny stocks are those shares whose share price is very low. Their low price attracts a lot of investors especially new one to invest in these shares.
These stocks have low market capitalization, and very little information about them is available in the public domain. They are highly susceptible to management fraud and financial mismanagement.
Many investors invest in these shares because their price is low and they think that by investing in these shares they will get a higher number of shares. If an investor has Rs 1000/- in hand, then he thinks that it is better to invest in those shares whose price is Rs 5 so that he will get 200 shares rather than investing in shares whose price is Rs 500 where he gets only 2 shares.
Penny stocks are highly volatile as compared to Blue Chip Companies. Retail-investors think that investing in these shares will bring a lot of return. Many times when the share price of penny stocks increase, investors earn a lot of money but investors also suffer losses when the price of these shares fall.
Desire to become rich quickly in stock-market force the investors to invest in penny stocks. There is no doubt that these stocks can offer a very high return as compared to blue-chip company when the market is in rising. But when market fall, these share fall sharply.
My friend started investment in stock-market in 2017 when the Sensex was breaking records. At that time the price of these penny stocks increased by 50-500%. My friend invested most of his money in these shares and was happy from his return.
With the starting of 2018, the Indian Stock Market start correcting itself. The price of these penny stocks falls by 50-80% within a few months. My friend lost almost his entire capital in stock-market and told us that he will never invest a single penny in shares because stock-market is gambling and you can earn only if you are lucky.
This not only happened with my friend, many investors left the market after suffering such a big loss.
Suppose if he controlled his greed and invested in blue-chip company then he might get a much lower return in 2017 but he would never have lost his capital in 2018. Blue-chip companies are less-risky. Their price doesn’t fluctuate so much. These companies also get affected by the news, emotions in the short term but long term these companies recover and give good returns to their investors.
It is always suggested that never invest in shares of any company based on price because it is determined by various factors. You should analyse the company’s fundamentals, profit and loss account, balance sheet, prospects etc., and if you are satisfied that the company will going to prosper and give a better return in future, then only invest in the shares of that company and invest for long term.
Suppose if the price of the share fall, then instead of selling the stock in panic find out the reason why the price of the share fall. If the price of the share falls because of any external reason but the fundamental of the company is strong and you believe that the company will give a better return in long term, then you can remain invested in the company.
After analysing you felt that your investment decision was wrong and the company is not going to grow then you can withdraw your money by selling stocks and invest in those company which will offer a much better return.
(VI) Stock-market is a money-making machine
Some people think that stock-market is a money-making machine where one can become rich quickly. No doubt stock-market can offer huge return and many investors earned a lot of money. But more than 90% of investors lose money in this market.
As an investor we want our money to be doubled or tripled within a year but the reality is that that stock-market offered 12%-15% return per year over the long term.
To earn more money from stock-market people indulge themselves in intraday and short-term trading. Generally, people get success in initial trading but they forget that a single loss in intraday trading can wipe out all their profit. If an investor earns money in intraday then he goes for more trades to earn more.
If an investor loses money then he trades more to recover his losses. He starts treating the stock market as his enemy which makes the matter worst. Their emotions took over their rational thoughts which result in more losses. Revenge trading is one of the biggest reason why the investor loses money in the stock market.
Entering into stock-market is very easy and one can start investment from any amount. It is always recommended that before investing in stock-market, you need to understand how the market work. If you start investing in stocks without understanding the market then there is more chance that you will lose your money.
There are many reasons why 90% of investors lose money. Forget profit, they lose their entire capital and start blaming the stock market. Stock-market always rewards those investors who invested their money after proper research, have patience and belief in their decision.
There are other reasons also because of which an investor loses his money in the market. If you know any reason, then you can comment below.