Stock Market
Why Investors Lose Money

It is indeed an irony that despite all the endeavors of relative, friends and well wishers to try and stop people close to them from losing money in the stock market, they habitually do not pay any heed to such advises till such a time when it is actually too late to make a recovery. Incidentally, only when an investor has lost substantial or most of their hard earned money that they eventually acknowledge that they have made blunders.

Actually, it is neither immoral nor something abnormal to make mistakes. However, the fact remains that the biggest mistake or blunder that one may make is not to acknowledge that he or she has made a mistake. When you are in the stock market, you can easily find out if any thing is going wrong with your investment. Any sign of you losing money in the market is apparent enough to let you know that things are not going on as they ought to be. Precisely speaking, if you find that you have lost over 10 per cent on your investment, you may virtually be certain of an imminent problem for you. Always bear in your mind that you are not investing your money in the stock market to lose it. Like any other savings, putting money in the stock market is also meant to yield you profits. Hence, the objective of this article is to help you in averting the errors most investors and share traders make in the stock market and eventually ruin themselves. It is important to note that on the majority of occasions we are our own nastiest adversary.

#1: Not trading your losing stocks

There are a number of people who prefer to keep hold of their losing stocks for a prolonged period of time for different reasons. In fact, the inability of such investors to break out of a losing situation early on is perhaps the most important explanation why such a large number of investing and trading accounts are wiped out and the investors ruined.

Well if you try to find why so many people hold on to their losing stocks so long, you will be surprised to know that their rationale behind such actions is basically psychological. Whenever an individual sells his or her stock at a deficit or loss, they usually ridicule themselves for not having traded it earlier when the price was higher. What is still worse is the fact that they will have to acknowledge before others that they have actually lost money in the transaction. Irrespective of whatever price the individual may have sold his or her stock for, they always have a feeling that they could and should have achieved more than what they actually have. There are a lot of people who believe that they can never go wrong while acquiring a stock or are beguiled by anticipation and avarice while making their stock picks. Again, there are several other investors who believe that the losing stock they are holding will recover some day or are actually scared to admit their failure.

It is interesting to note that when the market conditions were bullish, people not only did not sell their stocks even when they dropped by 10 per cent or 15 per cent, but, on the contrary, acquired more of these losing shares! When the recession started, these people actually had lots of time to break out of the plummeting market with insignificant losses, but many still declined to sell off their losing stocks. In fact, it took almost three years of the bear market before many investors comprehended that they have been holding on to their losing shares for a protracted period of time. Hence, the fact remains that when an investor has already lost around 80 per cent to 90 per cent of his or her endowments in the stock market, it makes little sense in selling off the losing stocks, unless, of course, if they want a tax waiver.

It is essential to prepare a plan even before you purchase your first stock if you wish to keep your losses little. Here is a very important guideline to avoid suffering any major losses on the stock market. When you purchase a stock you should position it in front of your computer or on your desk, so that you are able to regularly monitor all the price changes taking place. And, if you find that the price of your share has dropped by 10 per cent, sell it off instantly. The idea here is simple; you sold the stock simply because you lost money on it. In fact, you may install a stop loss arrangement at a price 10 per cent lower than the amount you had spent to acquire it. Alternately, you may also make a note mentally. Whatever approach you may adopt, the bottom line is that you need to initiate action when you find that your stock is losing money. This is true for stocks issued by companies that may appear basically strong, but the price of their stocks is going down for reasons that may not be evident right away. In this event too, your response should be to follow the 10 per cent rule - sell the stock when its price drops by 10 per cent.

Nevertheless, there are exceptions to this too. Suppose you buy a stock at a price that seems to be at the base and it does an extended sidelong move before losing 10 per cent of its value, it is okay to hold the stock, particularly if you anticipate profits in future. In fact, the '10 per cent rule' has been planned to stop willful investors and share traders from allowing a small beating to turn out to be a major loss.

#2: Allowing your winning stocks become losers

There may be occasions when you might feel that you cannot win irrespective of the timing when you sell your stocks. Even if have sold your stocks and made substantial profits, a persistent feeling may continue to haunt you that if you had held the stock for some more time before trading it, you could perhaps made more money. On the contrary, there are numerous people who after having earned huge amounts of money in the stock market sit back and vulnerably look at all their proceeds vanishing. Always bear this adage in mind 'what the stock market gives, the market takes away' and you will realize what we mean. There are many other investors who would disagree that the price of their preferred stocks will by no means draw level. There are numerous people who have not only gone down vis-à-vis the profits they made in the stock market, but also lost their entire original savings in the market. If you ever ask these people how they felt, they will tell you that it would have been less agonizing for them to not have earned anything at all in the stock market than having made money in the market and later lose it all.

Can you make an estimate of how many trillions of dollars people could have saved in the stock market had they traded some of their stocks while their prices were in an upward swing? It is regrettable indeed that majority of the people lack the restraint to sell a winning stock when it is at the top. There are a variety of reasons for them not initiating such actions. While some may be scared of the taxes they would be required to pay on the profits, others want to wait longer and see if their stocks can fetch them even higher prices. Again, there are a number of people who become overly sure of themselves when the prices of their stocks begin to rise.

Here is a piece of advice for anyone who has earned so much money on any particular stock that they are almost scatterbrained, an effect known as the 'high-five effect'. In such cases, he or she should sell 30 per cent of their profits, as this would enable them to put a certain fraction of their profits in secure possession. In addition, they may also appraise their stock portfolio afterward. Remember the saying popular among the share traders? "You cannot go broke taking a profit".

#3: Becoming too poignant regarding stock picks

One reason why the majority of the people should not take part in the stock market is their failure to manage their emotions or passions. Actually, there are lots of people who are swamped by different emotions when they are investing in the stock market with a significant amount of money at risk. In reality, when you become too emotional regarding your endowments in the stock market, it is an indication that you are likely to lose money. To tell the truth, making money should be as unexciting as standing in a queue in any supermarket.

Again overconfidence or becoming overly sure of oneself is a universal predicament that bothers anyone who has had a taste of success in the stock market. While it is essential to have some amount of self-confidence while you are making any investment in the stock market, letting your ego or personality to come in the path of your savings is a precarious indication. Believe it or not, one of the major reasons behind the bull market coming to an unexpected end is that during this period numerous people made lots of money in the market and started believing that they were nothing less than whiz kids. Always remember the ancient, but true adage that says, "There are no geniuses in the bull market". It irony is that while people earning lots of money in the market believed that they were geniuses, in reality, it was the force of the bullish market that was helping them to make profits.

Therefore, it is not surprising to note that before the bull market came to a sudden end, numerous investors became so insatiable that they lost their power to think straight. In fact, they began to day dream that the good times would continue eternally.

When the Dow Jones (an indicator of stock market prices; based on the share values of 30 blue-chip stocks listed on the New York Stock Exchange) and the NASDAQ (National Association of Securities and Dealers Automated Quotation) crashed down after the abrupt end of the bull market, the greed among the investors changed into anticipation. While in love and life people may always hope that the situation will eventually take a turn for the better, in the instance of the stock market, hope can ruin and wipe out your portfolio. In case, an individual is simply holding on to his or her losing stock because of hope that its price will rise again and not for any basic or technical cause, they are sure to lose their money.

It is important to note that the majority of the investors and share traders who are earning substantial money in the market are usually very impassive regarding the stocks they acquire. While making any decision regarding selling or buying shares, these people do not depend on greed, apprehension or anticipation, but only do so by going through the fundamental and technical information at their disposal. Looking back, you will find that the stock market was gripped by genuine panic way back in 1929 and again recently in 1987. Most people were of the belief that the price their stocks would be nose diving to zero and they were desperate to leave the stock market at any cost. Interestingly enough, the moment people were considering that everything was lost; the year 1987 appeared to be the beginning of an exceptionally strong market. Conversely, in 2000, people were actually very hopeful that the market would become stronger, but in reality they ought to have been scared.

#4: Gambling all your money on only one or two stocks

When people start investing in the stock market directly, they usually confront a major problem and that is not possessing sufficient cash to sustain an appropriately spread out portfolio. Usually, one stock ought to comprise over 10 per cent of any investor's portfolio. While it is a fact that diversifying your investment portfolio restricts your upward trend in profits, it also shelters you in the event of any one of the stocks you have invested in is performing poorly.

Supposing you do not have enough money to purchase in excess of one or two stocks, you still have a number of options. Firstly, you are able to purchase mutual funds, particularly index funds that enable you to buy the complete market for a small part of what it would have required you to spend if you purchased each stock in the index. Secondly, you are able to engage the services of a licensed investment consultant who will help you in managing your portfolio and also to diversify your portfolio appropriately.

Alternately, in case you think that you should stake all your money on just one or two stocks, you ought to purchase stocks in conventional firms having low price earning ratios (P/Es), preferably lower than 10 that propel their proceeds with quarterly dividends. In fact, you need to buy stocks in companies that are fundamentally so strong that they will yield profits for you for years to come.

The exceptions

In case you are an interim trader or may be a gambler, it is possible that you can make big money from the market by staking big on just one or two stocks.

It is also a fact that in case you put all your money in stake just on one stock and you win, you may as well make a small fortune for yourself. Nevertheless, adopting such an approach is something like gambling rather than investing. It is true that the chances of winning in the stock market are always much better than in the casinos of Las Vegas, even then it is hazardous to stake all your money on a single investment. In order to shield yourself from losses, it may perhaps be better to bet all your money on a proven mutual fund in comparison to putting everything you have on a single stock.

#5: Inability to be disciplined as well as supple

Ask the proficient investors regarding the main reasons why people lose money in the stock market, and just about everyone cite the absence of regulation and restrain is a major cause. In other words, lack of discipline makes investors more vulnerable while investing in stocks. When you are regimented, possess a plan, a strategy and a cluster of regulations, irrespective of what your emotions may be, you will always be sticking to your stratagem, rules and policies. In fact, being disciplined means that you possess the information to recognize what needs to be done, of course, the easy part, and the determination and nerve to actually do it (this is, incidentally the difficult part). When you are disciplined, you will always bind to your stratagem and also comply with your rules. If you look at the successful investors and mutual fund managers, you will find that these aspects have always proved to be effective in their success.

When the professional investors assert that you ought to be discipline if you want to be successful in the stock market, they are absolutely correct. However, it is also true that in order to win in the stock market, along with discipline you also need a certain measure of flexibility. In fact, being disciplined alone doesn't help. There were a number of investors who were so strictly disciplined and stuck to their stratagem so rigidly that they failed to react even when their stocks went against their interests. Hence, it is not surprising to note that many investors went down along with the sinking ship (the stock market) simply on the pretext of discipline. Although it is necessary for you to be disciplined, you must also be pragmatic enough to comprehend that you may also be wrong. Therefore, you need to be supple enough to be able to alter your strategy, change your plans and amend your rules when the time demands, particularly if you are losing money in the market. Always bear in mind that there are exceptions for each and every rule and strategy. To be both disciplined as well as flexible, you really need to be an outstanding investor.

#6: Not learning from blunders

Ask any veteran investor or share trader and he or she will agree you that compared to your winning shares, you will be able to realize more from your losing stocks. Incidentally, in the late 1990s most of the greenhorn or inexperienced investors earned huge amounts of money from the market without much effort and quickly. This was something bad for these novice investors, as when the bull market came to an abrupt end ceasing the easy flow of money, they were in the complete dark as to what their next action should be. The reason for this was simple. By virtue of a bullish market, these inexperienced investors made money right from the day they participated in the stock market and never realized how it felt like losing money in the market. As they had made all their money in a wrong manner, it was preordained that they would have to give it all back to the market. Remember the ancient stock market adage we discussed earlier? In fact, as long as you don't lose all your money, losing money may at times be good for any investor. This not only enables the investor to learn more about investing in the market, but it is always better to lose some of your money now than losing your entire fortune some time afterward.

However, in case you lose more than 10 per cent of your investment in the market (remember the '10 per cent rule'?), you need to react immediately and there are several things that you can do in such situations. Incidentally, in such cases, most investors would bury their heads in the sand, but you should avoid committing this mistake. Instead, sit down and take stock of things and try to comprehend where you went wrong or what were your mistakes. Making excuses or hiding from the problem will not help you. Instead, proceed in a manner as if the losses you made in the market were mere losing some papers and that you will be able to recover the losses at a latter period. Remember, unlike in love and in life, everything doesn't work out amicably in the market eventually. Therefore, it is wise to acknowledge the financial beating and be careful not to commit the same mistakes in future.

Having accepted the loss, you need to reassess your investment policy. It is important for you to closely examine the total market setting and individually study the status of each stock held by you. If you find that the shares you are holding are not based on technical and fundamental evaluation, it may even consider changing your investment portfolio. You may also hire an expert investment advisor to help you out.

#7: Paying attention to or obtaining tips from wrong people

If you find it difficult to comprehend the fundamental and technical analysis of stocks, there are other easier ways to locate stocks to purchase - go through the tips on different stocks. Obtaining stock tips has its own advantages. In this case, you are able to earn money with no work to be done! If this sounds incredible to you, believe us, it is true.

While tips on stocks can help you to earn money in the market without doing any work, it is also one of the easiest ways to lose your money in the market, provided if you give importance to stock tips originating from well intended, but unapprised relations or friends. It has been often seen that this type of people turn out to be vocal and enthusiastic endorsers of a particular stock and you try their best to persuade you to purchase it. As it is often difficult to say no to easy money, particularly when you obtain the tips from someone you have faith upon, there are a number of measures that you need to undertake with a view to diminish your investment risks.

First and foremost, do not take any action on any tip received by you until you have done some basic and technical research on the matter. If you observe the stock chart closely, it should be enough to provide you with some idea regarding the potential of the stock that has been tipped by your relatives or friends. It is regrettable that majority of the people devote more time doing research on a new television set compared to a stock. The irony of the entire thing is, there are many people who will not hesitate a bit before investing as much as $20,000 on a particular stock, but would devote an entire month to explore a television set worth merely $2,000. Thus, it is advisable that even if someone comes forward with a 'can't miss' stock tip that may appear to be too tempting to refuse to accept, you should only purchase small numbers of the stock, usually not more than 100 shares initially. In case, the tip proves to be a fiasco, which it will likely be in most cases, you will only suffer a small financial loss. At the same time, you would have also learned an important lesson.

As obtaining tips from inexperienced people often prove to be failures, do you think you should consider obtaining tips from the market experts? Although it may sound incredible, remember that most of the stock market experts whom we watch and listen on the television or who are quoted in different business papers and magazine are actually very poor in stock picking. Would you believe this if we say that the analysts told stories, economists went wrong about the economy, CEOs were exaggeratedly buoyant and accounting firms fabricated the figures to make a losing companies appear as if winners.

Simultaneously, insatiable and indolent investors, remember nearly all of us are culpable, should take the onus for purchasing stocks on the basis of the tips they received. (In fact, all and sundry desired to be a player, but most of us finished up being played or fooled.) Honestly speaking, the best ever counsel that anybody may receive on the stock market is also the most straightforward: 'Keep your ears shut'.

#8: Going behind the multitude

If you are eager to lose money in the market, then you are also free to do what others are doing. Sorry to say, that it is agonizingly hard to think independently or differently from others. If you get an opportunity to go through the biographies of some of the most successful investors and stock traders in the recent past, you will be surprised to learn that each of them did something different from what the multitude or crowd has been doing. And, these different things they did enabled them to earn their fortunes. In other words, this would denote that they were buying shares when others were selling, and selling their share while others were engaged in a buying spree.

If you happen to examine the emotional and mental constitution of the crowd, you will discover that a number of eras and incidents in history that bear out the herd mentality - or, as one author described it, the 'madness of crowds'. Of course, it is also possible for the crowds to emerge winners, but the fact is that they cannot continue winning for an extended period. As discussed earlier, one of the signs of the bull market coming to an end is that it would appear that all and sundry are participating in the market. On the other hand, when people are too scared to invest their money in stocks, it is a sign that the bear market is coming to an end. Time and again, it has been seen that the bear market normally comes to an end when everyone appears to shun the stock market and it looks as if it is the worst possible occasion to make any investment. However, it is regrettable that usually there is not a soul to ring a bell to declare the end of a bear market. It is entirely up to you to find out whether the bear market has ended giving rise to a new epoch.

Now the question is whether you really think differently from the multitude and, if you do so, how you do it. If you are unaware regarding how to think differently from the crowd, here are a few tips. To begin with, take a look at the stratagem that is ignored by majority of the investors. For instance, you may purchase covered call options on stocks held by you, buy and sell Exchange-Traded Funds (ETFs) or even short stocks. It is important to mention here that these policies may not be applicable or useful for the regular investors, but if you are among the people, who have sufficient time to undertake a little bit of extra study, may realize that adopting a different approach may often be gainful. The unfortunate thing about strategies is that once too many people come to learn about them, they no longer remain useful.

It is always important to bear in mind that people's observations regarding the market alter too often and also in haste. The crowd that was almost in a condition of ecstasy some time back has now transformed into an irritable and cynical lot. If you think that this is an exaggeration of fact, take a look at the following things: people's interest in literature on the stock market has diminished; majority of the people do not want to talk about the stock market any more, save telling you the amount of financial losses they have suffered; and, at the same time, there are lots of people who are demonstrating the consequences of a reverse wealth upshot, which is evident from the reduction in the sale of boats, SUVs and other items of lavishness. On the other hand, if you happen to be someone who is different from the mass, you will probably start looking for buying prospects, while the public has accepted defeat.

#9: Not being ready to face the pits

Prior to entering the stock market, you ought to be ready as well as equipped, and not afraid. While you should always look forward to the best to happen, you need to be prepared to accept if the most terrible occur. The major blunder that the majority of the investors often do is that they think that the stocks held by them will never fall. At the same time, they are neither ready nor equipped to face a prolonged bear market, an economic slump, deflation, a market crash or even any unforeseen incident that may devastate the market. Even though you never look forward to an economic catastrophe, prepare a 'crash-proof' arrangement on the basis of judgment and common sense, not something based on fear. Below find brief discussions on a number of measures that you may undertake to shield your investment portfolio.

Transfer More Money into Currency: When you have enough cash (this includes Treasury bills if the economy actually becomes frightening), it will be effortless for you to make composed or dispassionate assessments regarding where you may invest your money in case there is a market crash or economic slump. At a time when the financial system may be under pressure and the market is plummeting, it is very convenient to have cash. It may also be wise to have cash and wait in the sidelines for the time being till the market conditions improve or become favorable. In case the market actually gives up or the investors get caught in a deflation, one way that may help you to be a winner is to be full with cash at a time when the stocks may be selling at bargain or bottom prices.

Buy and Sell Less: If you happen to be a stock trader, you ought to restrict the number of shares that you are selling or buying. When it really becomes harder to earn money in the stock market, a number of people will try to wrongly recover the profits they have lost. Remember, between insatiability and fright, the former is more powerful and this is why some people will even mortgage their house with a view to become rich overnight. If it is essential to buy and sell shares, trade in lesser number of shares.

Undertake More Research: In case we get into a prolonged bear market, utilize the time to undertake market research, read literature related to the stock market and refresh yourself on the basic and technical examination. And when the market recovers again, in any case, the market will finally revert; you will be prepared with a handful of new stock picks.

#10: Foregoing or mishandling money

For most people, handling money is a very tricky skill. Nevertheless, it is also one of the most vital skills that an individual may possess. It is unfortunate, but true that if you do not possess the skill to handle your money properly you are bound to face financial problems. Of course, this will not happen if you engage someone to manage your money on your behalf. When you are participating in the stock market, eventually it is not important how much money you have earned in the market, but what matters is the amount of money you have been able to save. Do you know the moot issue of making money in the stock market or any other savings? If you don't, it is simple - avoid suffering any financial loss. When you reflect on this aspect for a substantial period, you will understand that it makes enough sense not to lose any money. However, it is evident that there is hardly any savings where one will never lose money, but this should not prevent you from trying not to lose money.

While mismanaging money is definitely detrimental for your financial health, missing any opportunity to earn money too is harmful. Having a tad of fear is helpful for it will always keep you alert. However, being possessed with too much of fear may often result in missing out on gainful savings or stock trading. In fact, apprehensions regarding suffering financial losses often prevent people from purchasing shares at basement prices. Again, it is the fear of missing an opportunity to make more profits often puts off people from selling their shares before it is very late. Actually, if you look at it logically, fear usually originated from being short of proper information. Hence, it is important that you should undertake your own study when ever there is a financial opportunity before you. This provides you with a chance to make a knowledgeable decision that is founded on facts and not any type of sentiment.

It is evident that you do not have access to every kind of data that you may be requiring in order to make a 100 per cent correct decision. Hence, you will have to make your decisions on the basis of whatever best data is available with you at that particular time. Therefore, there is little doubt that many a times you may even be wide of the mark.

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