Why people lose money in stock market

1 month ago JCprojectfreedom 0

We often hear people invest in stock market and suffer a huge loss. It seems like many investors can never make money in the stock market and it was said 90% of investors made huge loss. What are the reasons which cause investors to lose money?

Insider Trading

Sometimes you receive phone calls or emails from unknown sources which provide you with resources to invest. Some of these information are meant mislead investors to fulfill their purpose such as insider trading. In illegal insider trading, a small group of people buy into the stock early on and let out news that the stock price will rise, more and more people start to buy in due to greed and ignorance. At the peak of the demand, the insider will sell and lock in their profit. Then the stock price will plummet and often it looks like the shape of a shark fin. Recall Blumont Group story.

Margin Trading

Margin is a two edged sword, when you are on the right side of the bet, your gains are enhanced. However when you are on the wrong side, your losses will be magnified as well. In trading, it is about your trade size and manage your losses. One margin trade gone wrong will wipe out all the gain and even cause drastic losses. This applies to investing as well, invest with what you have.

Analyst Recommendations

Most of the analysts for retail investors are biased. They will take the safe route and will follow others through herd mentality. In other instances, they follow instructions from the company, they may have different view but as employees, they need to comply with company’s direction. At company level, they are biased towards certain companies due to business transaction and relationship. If the analyst is very good with his recommendation, why will he provide free advice to make you rich? He will not even become an analyst in the first instance.

Lack of Confidence

If you have done your homework, analyse the company, the industry, competitors, its competitive advantage and management, then you should be confident in your investment call. When there is market volatility, stock price could drop lower than your buy price but you need to be confident of your investment. When there is a market correction, investors may sell out due to lack of confident, this is when the institutions and fund managers will rush in to buy the stocks which are sold. Remember there is always another party at the other side of the game.

Lack of Patience

After making analysis, people lose money because they lack the patience to wait for their investment to grow. The stock price can drop 20-30%, investors sell out to switch to other stock and the price swing back with a vengeance to increase by 40-50% more than initial price. To be good investors, your holding period should be forever until the fundamental changes for the worse or the investment theory has changed. Great companies are not built in a day and sometimes even great companies can reach a certain stage slow down its growth and decline, then management steps in to rebuild and propel to another level. These are growth and decline of a business which takes time. Stop focusing on the share prices!

Herd Mentality

People tend to follow what others do and have a herd mentality in terms of investing. Do not follow blindly on what others are buying even if he is Warren Buffet. You do not know what their investment strategy is and the purpose of buying or selling the company. When they sell, they may have identify a better buying opportunity, have you?

Lack of Investment Knowledge

You need to learn the fundamental of investment before you invest. what is a share? What are the risks? You need to learn the company’s fundamentals like Debt to Equity Ratio, compounded sales growth rate, P/E, PEG, P/B, profit margin, market cap, etc. Lack of knowledge will definitely lead to losses.

Get Rich Quick Mentality

Stock market is not a casino to get rich quickly. If you want to get rich quick, I think it will be better to go to a casino. This type of people pump their money into the stock without making the necessary analysis and the money is evaporated when the price drops quickly. They will panic and sell, blaming the stock market that it cannot make money.

Stock Price versus Value

Like most retail investors, my mother always think $1 stock price of a company is cheaper (in terms of value) than a company with $10 stock price. Remember stock price does not equate to value. We mean a stock price has its intrinsic value and we always aim to buy a safety factor below its intrinsic value. For instance, the stock price of Genting Singapore is now $0.90, its intrinsic value is $0.85 and you need some margin of safety, you decide to buy when the price drops to $0.70.

Conclusion

There are many factors which may cause investors to lose money. Along the way we get wiser, learn from our own mistakes after losing money, then we improve in our investing skills. I have never met someone who is successful in investing and never lose money. The key is to understand yourself and do not repeat your mistakes.