The stock market has a very bad reputation in India, most people think that putting money in the stock market is no different than gambling.
That is because only 2.5% of India’s population invests in the stock market and out of that, 90% of the people lose their money in the market.
The smart investors are able to make money in the stock market because of the fools who lose it.
If you have just started your investing career or you are the one who has already lost a lot of money then after reading this article you will be able to prevent the most common mistakes which can drown your money.
Let’s see what are the 13 most common mistakes because of which people lose their money in the stock market :
1. Investing without any proper knowledge of the stock market
Most people go to try their luck in the stock market but end up losing their money because luck doesn’t work in the market, luck can make you money in the short term but in the long run you will end up losing your money if you don’t have proper knowledge on the stock market.
Would you sit in a car if the driver doesn’t know how to drive it ?
Obviously not, only a fool will ride with such a driver. But people make this mistake in the stock market; they take their money on a ride without knowing how to invest.
The stock market is not a place where people with luck make money, it’s a place where people with knowledge and experience make money.
2. Investing in stocks by listening to other’s advice
Many people start investing by taking other’s advice or by searching “which is the best stock to invest your money ?” on Google and end up losing their money. This is one of the foolish things that a person can do to lose his/her money. You should always do your own research and invest accordingly.
If you are seeing that most people are losing their money in the stock market and you are investing your money without knowing what are the mistakes because of which they are losing it then you will also end up making the same mistakes. So, before entering the stock market you should know what are the things that you should not do which can drown your money.
3. Not doing proper research
Many people lose their money in the stock market because they don’t do proper research. You cannot invest in a company by just looking at their income statements and the financial ratios.
When you are buying a stock you are buying a part of a business. So, while doing your research you need to think like it’s your business and you are going to run it. A person won’t be able to run a business if he/she doesn’t know that company inside out.
You need to find out everything about that company, like what the management is saying about the company and how it’s management perceives the future, whether the company has been able to achieve its goals that the company was talking about in its previous annual report, whether there are some cases running on the company or it was involved in some wrongdoing in the past, and many more such things.
4. Follow the herd
This is a very silly mistake that the majority of people make in the stock market. They buy the stock that others are buying.
As I mentioned earlier that 90% of the people who invest in the stock market lose their money and if you are doing what these 90% people are doing then how do you expect yourself to make a profit.
If there are some good words going around in the market about a stock and everyone is buying it then you must understand that the stock has already become expensive and buying an overvalued stock will be a big mistake.
There are a lot of other stocks in the market; you just need to find the ones with strong fundamentals and are undervalued at the same time. If your research is correct then definitely in the near future market will appreciate that company and the price will spike up giving you a good return.
5. Have no idea about the company’s business model
Owning stocks is like owning a part of a business and it will be very foolish to buy a business without understanding how it makes money. You can’t buy a company’s stocks by just looking at its income statements and financial ratios, it may give you some return in the short term but in the long run you may end up losing your money.
While investing in a company you need to think like you are going to be the CEO of that company and will have to run it and if you think that you understand its business model completely, only then invest in that stock. Because if you won’t have an understanding of the company’s business model, you won’t be able to judge its actions and may end up losing money.
6. Lack of patience
If you want to be a successful investor, you must learn to be patient. Because of a lack of patience and confidence in their research, many people sell their stocks due to short term volatility, settling with a loss.
Here you need to understand one thing that investing is a long term game. Doesn’t matter how good the fundamentals of a company are, if you are investing in a company you will face short term volatility. If you have done your research properly then you have to trust it and have to give it some time, the market will appreciate that stock and you will receive a good return.
7. Do not diversify their portfolio
Let’s suppose there are 10 pots with different quality of soil and you don’t know how many of them have good quality soil but you have plenty of seeds for all the 10 pots, what would be the smartest thing to do here if you want the maximum number of healthy plants ?
Obviously, you will put your seeds in all the 10 pots.
Now, what will happen if you put all your seeds in only one pot ?
It will increase the chances of your seeds getting wasted and you may not have even a single healthy plant at the end.
But people make this same mistake in the stock market, they invest all their money in 1 to 2 companies and expect to get a good return.
8. Want to get rich quick
Many people in the greed of getting rich quick invest a big portion of their capital in penny socks but they don’t realize the risk of putting all that money in penny stocks.
Penny stocks have the potential of giving a very high return and the potential to drown your capital leaving you broke. There are very few penny stocks that grow and actually give a very high return.
Let’s see how penny stocks are riskier than the stocks of mid and large-cap companies :
2. When a mid-cap or large-cap company faces some big problems, there is a very high chance that they will come out alive and will recover with time. Whereas in the case of small-cap companies there is a very small chance that the company will be able to survive it as they are not that well established and financially sound.
9. Holding onto losses while booking profits too early
Many people don’t know the right time to sell a stock because of a lack of knowledge. In fear of volatility, they sell their profit-making stocks early settling with a small profit while they could have waited a little longer and have made a nicer profit. Whereas they wait for their losing stocks to recover (which is most cases never happens) so that they can settle will a small profit or a minimum loss. This minimizes their profits and maximizes their losses.
Even the great investors don’t make money in every stock they invest in but they cut their losses early and sit on the winning stocks and wait for the right time to sell them. Every investor loses money but the goal is to minimize your losses and maximize your profits.
10. Do not learn from their losses and profits
Whenever you lose money in some stocks you should always analyze it and find out the possible reasons behind it, this will prevent you from repeating those mistakes.
Even if you have earned a profit you should analyze it, this helps you in finding the winning stocks in the future and will increase your efficiency.
11. Do not follow the news
This mistake is mostly made by newcomers. If you have invested in some stocks and have left it for some years thinking that it will grow with time, then trust me you are wrong. If you want to do investing seriously, you need to follow the news regularly to keep up with the company’s activities and what the experts are saying about the country’s economy and GDP and things like that.
This way you will stay alert and will know whether the company has done something which according to you is not good for its future or whether the company is involved in some wrongdoing, etc.
12. Developing attachment to a stock
If a company’s stocks have given you good returns in the past it doesn’t mean that it is going to give you returns again. You cannot invest in the same stock again based on your old research, you need to do it again and check whether it is worth your money or not.
13. Can’t perceive the future
While picking a stock, looking for solid income statements, and how the company is doing overall in the present is not enough. You have to understand the trend and predict whether in the future there will be the same need or demand for the company’s products and services or not.
Let’s understand this with the help of a real-life example.
There was a time when digital cameras didn’t exist, that was the time of analog cameras. If you are from that time you would remember that we used to buy those Kodak rolls for our cameras then after clicking photos, we use to take the rolls to the photo shops so that they can convert it into physical form and we can fill our photo albums with new memories. Kodak was the leading company in the field of cameras at that time.
Heare's a task for you, go and check the price chart of Kodak from 2000 till now.
Heare's a task for you, go and check the price chart of Kodak from 2000 till now.
0 Comments