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There is not a single person who invested in the stock market but never lost his money. Unfortunately, many investors lose their money in the stock market and never earn any single penny.
According to popular research, 90% of investors lose money in the stock market. Instead of earning income or profit, they lose their hard-earned money. Despite that, the number of investors investing in the stock market is increasing day-by-day.
If you pay attention, you will find that 90% of investors who lose their money in the stock market are not actual investors. They are traders who invest money in intra-day trading without any real knowledge, trading skill and any long-term investment horizon planning.
It doesn’t mean that the long-term investors never lose their money, they also lose money. However, the percentage of long-term investors loses money in the stock market is very low. The reason is that, instead of earning from short-term volatility in the stock market, long term investors focus on wealth creation in the long run.
No matter, whether the investors focus on long-term wealth creation or earning money from short-term volatility, there are some mistakes which both investors do while investing in the stock market.
A. Why Investors Lose Money in the Stock Market?
There are multiple reasons why investors lose money in the stock market. Although knowing all those reasons and improving them is not a guarantee that the investor will never make any loss in the market, but it is guaranteed that the investors will be less likely to lose. Let’s take a detailed look at some of the major reasons.
1. Not doing enough research
If you want to earn from the stock market then you have only two options. Either you should invest in the shares of that company, the company you know everything about or the company whose shares you want to invest in, know all about that company.
Most investors never try to understand the business fundamentals, financial statements and future projections of the company in which they are investing. They simply invest in the shares only by comparing the share price. The main motive of these investors is to book profits as soon as possible.
On the other hand, many investors who study financial statements compare business performance over the last few years. They research the scope of the business in future and the company policies to meet future challenges. After completing their research and study they decide whether to invest in the company or not.
The investors who invest a lot of time in researching over the company most of them invest for long duration and never try to book profit from short term fluctuations. The reason is that if the fundamental of any company is sound, then the company’s share price might fluctuate in the short run but in the long duration, these companies will reward their long-term investors. Long-term investors believe in creating wealth in the long duration and this is the reasons, most of these investors create wealth and earn a lot of money in the stock market.
Most investors lose money in the stock market because they do not do enough research on the stock market.
2. Invest only as much as you can lose
When I first invested in the stock market, the market was growing rapidly. I stepped into stock for the first time, so a lot was new for me. Like many people, I invested almost all my savings to earn in the growing stock market. For about 6 months, I benefited from the growing stock market, but on the day of the budget announcement, the government came out with such policies that in the next 3 to 4 months, the prices of all my shares fell 30 to 40 per cent.
That day I came to know that invest only as much as you can lose in the stock market.
3. Lack of Patience
An impatient person always makes mistakes. You can never make the right decision in a hurry. This would also apply to the stock market.
Many times investors buy quality stocks but are not able to keep patience. Just buying quality stocks is not sufficient; you have to trust in your investment decision. You have to give time to your investment to grow so that they can fetch you a good return. But unfortunately, this doesn’t happen; most investors get afraid of slight fluctuations in the stock market and sell their stocks in a hurry.
4. Tips and Advice for Investing
Investment is simple but not easy, especially if you are investing for the first time.
On one side, people want to earn a lot of money, but on the other hand, there is a fear that their money will not be drowned.
This is why most people seek advice from others especially from relatives and friends. Many people invest in those shares which are been recommended by their friends and relatives.
Nowadays, there are tons of websites, journals, magazines and brokers who give us recommendations to invest in stocks and funds. Most investors fall in these nets and follow these recommendations and invest their hard-earned money.
There are chances that most of these recommendations are either paid by the company whose stocks are being recommended or these recommendations are based on a person’s own goal.
Every person has his or her own goal. The stocks suggested by the experts may be beneficial for most investors, but there is no guarantee that the suggestion will be beneficial for you as well. Therefore, it would be better not to blindly invest by following research suggestions. You invest only after you are fully satisfied.
5. Lack of Diversification or Over Diversification
Many investors invest only in few companies or sectors which they think will grow in future. If you have done your research and find out that any particular company or sector is going to give a huge return in future, then you can invest in that company or sectors.
But investing all your money only in that company or sector is not a good idea. Suppose, in case of any uncertainty or by the change in government policies if the business of that company or sectors is negatively affected then you may lose all your investments.
So, it is always advisable to diversify your investment. You need to invest in different companies and sectors so that in case of any loss in one sector, the profit of other sectors can compensate for it.
However, if you invest in too many companies, then it will result in over-diversification. Just like the lack of diversification is bad for your investment, over-diversification is also bad for your investment. If you invest in many companies, then it will become difficult for you to manage your investments.
There is no such ideal number of companies to invest. If you are a new investor then you can select 20-25 companies from different sectors. Investing in 20-25 companies from different sectors will not only diversify your investments, but it also helps you to manage your investments.
6. Investment in Penny Stocks
Penny stocks are stocks that have a very low price. Most of the share price of penny stocks is in single digit. Their low price attracts a lot of investors especially the new investors to invest in these shares.
Many investors invest in penny stocks due to the very low price. Any person can acquire a large number of penny stocks with a small investment. Suppose, if an investor has Rs 1000/- in hand, then he thinks that it is better to buy 200 shares of Rs 5 and not 2 shares of Rs 500.
The volatility of penny stocks is high as compared to blue-chip companies. Due to the volatile nature of penny stocks, they are favoured by many investors. Investors want to get advantage of its volatility and earn a lot of money.
My friend started investment in stock-market in 2017 when the Sensex and Nifty were breaking records. During that time, penny stocks gave the return of 50%-500%. In order to earn more money from these shares, my friend put all his money in these stocks.
With the starting of 2018, the Indian Stock Market began to correct itself. The price of these penny stocks fell 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, but many investors also left the market after suffering such a big loss.
Suppose if he would have controlled his greed and invested in blue-chip companies 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 be going to prosper and give a better return in future, then only invest in the shares of that company and invest for long term.
B. How to recover the money you lost in the stock market?
Most people invest in the stock market so that they can earn some extra income. But unfortunately, most of them lose their money. Loss in the stock market doesn’t only affect us financially but also emotionally. No matter how expert you are, the loss in the stock market can’t be avoided.
When investors lose money in the stock market, either they get panic and leave the market or they start over-trading to recover all their losses.
Remember, if you leave the market then you will not get your money back. You will also lose the opportunity to create wealth from the stock market in the long run. There is no doubt that after making a loss in the stock market; it is very difficult to invest more money in the same market.
Success in the stock market is never met by denying, abandoning the market or by taking investment decision emotionally. If you want to become a successful trader, then you have to learn from this loss and treat it as an opportunity to become a more knowledgeable trader.
Here are a few things you can do to recover the loss in the stock market:
1. Accept Responsibility:
The first step you need is to accept responsibility for all your losses. It is very easy to blame others or your luck after losing your money in the stock market. But it was you who took all the investment decisions.
Even after taking investment advice from experts, you may lose your money. But in this situation also, it is not wise to blame them. The experts only recommend you, choosing experts and following their recommendations is all on your hand. Experts can only recommend you; they can’t force you either for investment or withdrawal your money.
If you want to become a successful investor, then, first of all, accept your responsibility. Learn from your mistakes and if possible try to learn investment skills.
2. Never leave the market:
Most investors leave the market after suffering the loss and never dare to invest again. Entering and exiting the stock market is very easy. Anyone can enter and exit the stock market at any time. So, if you want to leave the market after suffering losses then neither your broker nor any policy can force you to stay invested.
Will you get back your lost money by leaving the stock market?
The only way to recover your money is to remain invested in the market and search for the opportunity to not only recovers the lost money but also to earn decent money.
3. Avoid Over Trading:
After losing money, many people start over-trading to recover their losses. But this makes their situation worse. Whenever a person makes a loss in the stock market, most of the time he gets nervous and wants to recover his loss as soon as possible.
But over-trading is never good in the stock market. You can’t make money by investing and selling any share randomly.
Take some rest and forget all your loss and if possible avoid any investment or trading in the stock market. Don’t try to time the market, instead of that wait for the right opportunity and then start your trading journey with new hope.
4. Learn new trading skills
Most people lose money in the stock market because they don’t know the right time to invest in the stock market and the right time to sell their stocks.
Picking the right share at the right time and the right valuation is the success mantra of the stock market.
Having financial knowledge and trading skills are very important to earn money. You must invest your time in gaining financial knowledge and learning new trading skills.
If you develop a good understanding of the stock market then the chances of earning money will increase and you don’t have to depend upon recommendations and tips.
Entering into stock-market is very easy and anyone 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 has trust in their decisions.
Frequently Asked Questions (FAQs)
Generally, investors are advised not to sell stocks at loss. Selling stocks at loss convert the book loss into real loss of money. But still, there are many situations where investors should sell their stocks at a loss
A) When you need money in an emergency
B) When you bought a wrong stock
C) When the price of stock rise dramatically
D) Better Opportunities
Yes, you can withdraw your money by selling your stocks. But you can sell your stocks on the trading hour only and the proceeds from selling the stocks will be available for withdrawal after 2 days.
Suppose, you sold your stock on Monday, then your money will be available for withdrawal on Wednesday evening. However, the proceeds from the sale of share can be used immediately to make new trades.
Although, Stock-market can offer excellent return, but this market is uncertain. So, investing all your money in the stock market is not the right decision.
There is no penalty if you sell your shares. However, you have to pay brokerage charges, Security Transaction Tax (STT) and other fees. In addition to that, you have to pay capital gain tax if you made a profit by selling your stocks.
90% of investors lose money in the stock market.