The world of opportunities and big money attracts us all. Isn’t it? This world is where you earn big bucks for very little investment of time and money. A world where the solution to all the problems lies. This is the story in which most stock market beginners believe. In other words, the story of riches.
The stock market is generally considered a get-rich-quick scheme amongst many retail investors. And it is not their fault entirely because they have grown up seeing the media showcasing stock market winners – people who were nothing, and became millionaires and billionaires in a short span of time. And sometimes this gives rise to the casino mindset. A mindset that only thinks of making big in financial markets. I must say it is highly lucrative but extremely dangerous.
With this kind of thought process, we can very well imagine what may happen. A lot of people suffer not only financially, but also emotionally. And it does not end there. It is the families who face the brunt – kids, spouses, parents, and other members as well.
Although there are many fundamental reasons behind people losing money in the stock market, today we will evaluate the top 3 reasons why people lose money in the stock market.
1)Following tips and rumors on TV and social media
The fundamental question you need to ask yourself is “Why would someone try to make money for me?” What is the other person’s benefit if I make money in the stock market? If there is no apparent benefit to the other party, then you have reasons to doubt. There are some genuine advisors and analysts, but the vast majority are on the other side. News and tips generally come when the stock has already made its move. Hence, it is futile to think that one can make money consistently by following news and tips. Yes, once in a while, we see people earning money from tips, but it is a trap. Hence, always trust your own research and analysis.
2) Improper position sizing
Imagine you get to know (through your own research or some advice) that a stock is expected to give a huge up-move in the coming days. Armed with this knowledge, what will you do? Usually, people buy that stock in truckloads of quantity in the anticipation of that big up-move. And when that up-move does not come, we know what happens to those retail investors. Hence, the best approach is to divide your capital into 10 parts equally and invest them equally amongst 10 stocks. Never invest more than 10% of your capital in a single stock.
3) Trading without a stop loss
Will you ever drive a car that does not have brakes? Obviously no. But stock market beginners usually trade in stock without putting a stop loss. They see it as a potential loss but they fail to realize that it is actually a mechanism to stop the loss. A Stop loss order is one that instructs the broker to sell the stock below a certain percentage of the buying price or at a predefined price. A trader should always try to limit losses and maximize profits. This is the only way to sustain in the market for a long time.
Never venture without a stop loss. That’s it.
While the above 3 reasons cover most of the common mistakes beginners make, there are many other areas where one needs to pay attention to protect the capital. Always remember these 3 rules:
- Don’t follow tips and rumors
- Don’t put more than 10% capital in a single stock
- Always apply a stop loss