Trading in Stock Market is quite obviously a high-risk game. When new investors get started in the stock market, many times they are disappointed when their purchase value drops. Not understanding why or what happened, often times the investor makes rash decisions.
Common mistakes that people commit include:-
- averaging your positions,
- trying to outsmart the market,
- over trading to recover losses,
- focusing too much on hot tips etc
These have created many Indian stock market loss stories. it’s common to experience this in your investing scenario, we know as we certainly did. But looking back at our mistakes and researching others, there are a few other reasons why most people lose money in the stock market.
There, of course, is no guarantee of your success in Stock Market. But if you are investing for the long-term, the below information may be beneficial to fill your pockets and avoid losing money in stock market :-
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1. Learning to self-trade rather than going by tips
It is quite simple to get a relentless flow of tips on trading but very hard to make money on these tips. The best way to succeed in trading is by learning to self-trade. It is impossible to make money by listening to tips and titbits from friends/FB/WhatsApp/TVs etc.
You need to work on charts, understand structures and learn to put your own trades independently. Many traders do not want to take this effort and that is why they underperform and loss money due to trading without research and analysis.
I know reading a stock or fund prospectus can make your eyes glaze over. Many of these “recommendations” might be paid for by the company who’s stock or fund it is. And other recommendations might be based on that person’s own goals, but you and your investing situations are unique. You are putting your hard-earned money to work, so you must understand the “why” and “what” before investing in something.
NOTE: Not all recommendations or reviews about stocks or funds are bad or paid for, but you still need to do your own due diligence before dropping your hard-earned cash.
2. Diversify, but don’t over-diversify
The goal with a diversified portfolio is to include various industries and categories that react differently from each other. This way it helps reduce risk, especially long-term.
Portfolio diversification is very important as it help us to minimize our non-market risk. Non-market risk is something that an investor can control unlike market risk. Non-market risk is directly linked to the company’s performance, while market risk is linked to macro events like recessions, changes in interest rate, natural disasters, etc.
For example, certain stock funds might have a higher reward, but so is the risk. If you went all-in with that you might do well during a great market. But as soon as things turn red, you can wipe out all returns and potentially more.
It’s why people mix in funds like stocks, bonds, REITs, cash, real estate, commodities, gold, silver, etc. Ultimately what you choose to invest in is based on your goals and horizon, but always diversify.
3. Invest in Good Companies
When I talk about good companies, I mean companies with a strong business model that preferably earn recurring profits, and have a dominant market position. They make good return on equity with little debt and generate strong cash flows that allow them to return excess money to shareholders as dividends. Companies like these give you a higher probably of success and allow you to turn your portfolio around. But do note that investing in a good company also depends a lot on getting a good price. A good company can still be a bad investment if you pay too much for it — that’s one of the most common ways people keep losing money in the stock market! So never overpay for a stock.
4. Focusing on being right rather than on making money
Showing your emotions and being human can be a great thing. But with investing, emotions tend to create costly mistakes that drive bad decisions.
There is a subtle difference being right and being in the money. Let us start with a theoretical question. What is the difference between an analyst who predicted the Nifty direction 9 out of 10 times right as against another analyst who predicted only 6 out of 10 times right? The answer is that there is no difference because both did not make money on the trade. The focus of the trader must be on making money on the trade and not whether the bottom and top of the market was caught. The trader needs to be crystal clear that the core focus is to make money.
Here are some examples of emotional investing:
- Being too invested in a specific company because you love their product, you work(ed) there, family history of working there, etc. So you base your investment choices on that alone.
- Similarly, instead of buying low, selling high, you let emotions get the best of you and buy high because there are new records and everyone is excited.
Then when things turn to panic or some corrections set in, you get nervous and sell for a loss when it would have recovered had you held and kept consistently investing.
Those are just a few scenarios, but you get the picture. Remove emotions from as best you can when it comes to your investing.
All the reasons I mentioned above, It’s easy to lose sight of the big investing picture and make mistakes. But like most areas in personal finance, you can overcome and correct your ways by considering above while trading.
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