There is an old but very famous joke about the stock market. If you have lost some money in the stock market and feel bad about it, don't worry. Ask somebody you know about their losses in the stock market, and you will feel better that you lost less money.
While this joke has been doing rounds for several decades now and is still quite relevant because there is absolutely no shortage of people who lose money in stock markets every day. According to popular estimates, as much as 90% of people lose their money in stock markets, and this includes both new and seasoned investors.
Isn't it shocking? But it is a fact. There are countless reasons why investors lose money in stock markets. Let's take a detailed look at some of the top reasons.
Investing on the basis of rumours and stock tips
Many investors, especially new ones, fall for the trap of investing based on stock tips given by others without realizing the fact that the person offering the tips, themselves depend on others for it. And if stock tips from friends/relatives/colleagues were not enough, in today's digital world there is a constant bombardment of information which includes stock tips on social media, WhatsApp groups and business news channels. Click here to read about 3 wrong reasons to buy a stock
The moment we switch on a business news channel, we can see many self-proclaimed experts or hosts urging us to buy or sell stocks in the next millisecond on the hope of making good money. All this creates 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.
The pitfalls of stock tips can be best illustrated with the example of Infibeam Avenues. The stock of Infibeam Avenues fell by about 71% on 28th September 2018 from around Rs. 197 to around Rs. 50 after a WhatsApp message circulated in a trader's group sparked panic among investors who went on a selling spree.
The extent of the damage was so severe that the company's MD had to issue a statement "Some WhatsApp rumours took rounds in the market, and it created panic among market participants and investors at large. We categorically rescind such rumours which are erroneous and motivated.
It is said that "Bad news is usually good news-for somebody else". This is 100% true about the news we hear about equities. Many times, a fabricated report is deliberately released through media by some entities with dubious interests because they want the viewers to believe that the news offers them some competitive advantage.
To quote a real-life example, the stock of Graphite India was a hot pick on most business news channels and websites in September 2018 with a potential upside of Rs. 400 from the then market price of Rs. 1,000. However, four months later the same business news channels and websites were giving a sell call for Graphite India, with a target of Rs. 530. Currently, the stock is trading at Rs. 290 levels.
Can you imagine the kind of loss an investor would have incurred if he had purchased the stock of Graphite India based on buy recommendation given by the business news channels and websites?
Always remember that not all information is relevant information.
Investing in penny stocks
Just like the name suggest, penny stocks are stocks which trade at very low prices, usually in single digits or even lower. The low cost is what makes them attractive to some investors. However, in this process, investors often forget that price and value are two different things. Know more
Penny stocks have low market capitalization, and very little information is available about them in the public domain. They are highly susceptible to management frauds and financial mismanagement.
Investing in penny stocks is like dumping your money in the drain. Some investors learn to discover this the hard way. Prakash Steelage, Lanco Infratech, Gemini Communication and Birla Power Solutions are some prime examples of penny stocks that destroyed over 75 – 90% investor wealth.
Indulging in intraday and short term trading
Many people indulge in short term trading because it gives them a thrill, a sense of adventure and a feeling that one can become rich quickly. But trust me, if you want excitement, go to Vegas. This is because wealth creation is a boring and long process.
Generally, people, associate success in initial one or two trades, and with this misconception goes for more trades with higher margins. In this process, what they fail to realize is that losses on one failed trade could potentially wipe out all their previous gains.
To make matters worse, people who lose money in intraday trading often resort to revenge trading to recover their losses by looking at the market as an enemy which imposes unjustified losses. In this process, their emotions take over rational thought process, which results in additional losses. Revenge trading is one of the underlying reasons why many traders lose their entire capital.
Lack of patience in investing
Patience is one of the greatest virtues required for long term investing. Investors who understand the value of patience, gain from it while those who don't, pay a heavy price for it.
In the short term, markets and stock prices are affected by news and emotions. Any changes in economic, global or political factors can impact share markets in short term periods. However, in the long term, stock prices are governed by the fundamentals of the business and its earnings.
Many investors invest in good stocks, but panic and sell them at the first sign of correction resulting in a 'Buy high and sell low' situation. Precisely the opposite of what they should do, i.e. 'Buy low and sell high.'
"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.
Not investing in fundamentally sound business
Fundamentally sound stocks have a transparent and robust business model and professionally well-managed. Such companies can survive any economic downturns and are usually the first to recover and outperform as when the economy improves.
As you might be aware off the year 2008, 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 of the same for your reference.
As you see, there are many reasons why 90% of investors lose money in stock markets. Forget profits, most of them even end up losing their entire capital and end up blaming the market or their luck for their financial misfortune. Successful investing in equity is no rocket science. It’s all about investing right, being patient and avoiding costly mistakes.