There is an old but famous joke about stocks and 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 about losing less.
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 daily. According to popular estimates, as much as 90% of people lose money in stock markets, including 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.
1. Investing in the stock market based on rumors and stock tips
Have you ever received an SMS which reads like this “Buy 1000 quantity of XYZ stocks for xx price? Huge upside expected in one month as it will be acquired by ABC company” or “Invest in bulk in XYZ stock as the company to soon acquire exclusive distribution rights of ABC product or service. So buy now at a low price of xx to sell at a high price of xx x within a few months”?
Such messages are deliberately sent through bulk SMS by fraudsters who operate as a stock market cartel with the sole intention of cheating innocent investors by trapping them into buying stocks with no fundamentals associated.
Many investors, especially new ones, fall into the trap of investing based on stock tips given by others without realizing that the person offering the advice depends on others for it. And suppose stock tips from friends/relatives/colleagues were not enough in today’s digital world. In that case, there is a constant bombardment of information, including stock tips on social media, WhatsApp groups and business news channels. Click here to read about 3 wrong reasons to buy a stock.
When 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, hoping to make good money. But unfortunately, it 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 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 stories which are erroneous and motivated.
It is said that “Bad news is usually good news for somebody else”. It is 100% true about the news we hear about equities. Often, 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. 1,00. However, four months later, the same business news channels and websites gave a sell call for Graphite India, with a target of Rs. 53. Currently, the stock is trading at Rs. 181 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 recommendations given by the business news channels and websites?
Always remember that not all information is relevant information.
2. Investing in penny stocks in the Indian share market
As the name suggests, penny stocks trade at low prices, usually in the single digits or even lower. The low cost is what makes them attractive to some investors. However, investors often forget that price and value are two different things in this process.
Penny stocks have low market capitalization, and very little information is available in the public domain. As a result, they are highly susceptible to management fraud and financial mismanagement.
Investing in penny stocks is like dumping your money in the drain. Unfortunately, some investors learn 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% of investor wealth.
3. 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 they can become rich quickly. But trust me, if you want excitement, go to Vegas. It is because wealth creation is a tedious and lengthy process.
Generally, people associate success with initial one or two trades, and this misconception goes for more transactions with a higher margin. However, in this process, they fail to realize that losses on one failed transaction 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 the rational thought process, which results in additional losses. Revenge trading is one of the underlying reasons why many traders lose their entire capital.
4. Lack of patience while investing money in stock market
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.
In the short term, markets and stock prices are affected by news and emotion. In addition, any economic, global or political changes can impact share markets in the short term. 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.
5. Not investing in fundamentally sound businesses
Fundamentally sound stocks have a transparent and robust business model and are professionally well-managed. As a result, such companies can survive any economic downturns and are usually the first to recover and outperform when the economy improves.
As you might be aware, 2008 witnessed one of the worst corrections in the history of the stock market. 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.
Again this is what happened to post the severe correction in March 2020, where indices fell sharply after the emergence of the Covid-19 pandemic. However, markets were quick to recover, and Indian indices touched new lifetime highs in fewer than 11 months.
As you see, there are many reasons why 90% of investors lose money in the stock market. Forget profits; most of them even end up losing their entire capital and 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.
Some essential pointers which will help you to create wealth:
- Buy in tranches: Use every market correction as an opportunity to buy at discounted prices.
- The stock-specific approach works best: Identify quality businesses and start accumulating them in small quantities.
- Think long-term: Invest for at least 3-5 years or more.
- Maintain your focus: Don’t get distracted by too much information or rumors you may receive via WhatsApp/Twitter/news channels.
- Don’t try to time the market: Don’t try to time the market by attempting to catch the highs or lows.
Read more: How Long-term investing helps create life-changing wealth – TOI.
This article was last updated on 24/06/22