How not to lose money in the stock market?

By Tori 2 years ago
How to trade the NYSE's Rule 48

Today, stock markets are reaching stellar heights. Everyone wants a finger in the pie. People assume that all they have to do is buy stocks to become another Rakesh Jhunjhunwala. However, that is a fallacious belief as not everyone has made money investing in stocks.

“I lost money in stock markets!” This is a frequently heard complaint. Equity investments yield good return when you invest for at least five years. Investment theory teaches us that a “buy and hold” strategy yields far superior returns vis-a-vis frequent trading. But most investors fail to follow this and also end up making some other mistakes that lead them to lose money in the stock market. 

Why are your investments losing money in the stock market?

  • You have not done sufficient research to understand the intrinsic value of a share, the ethics of the management and promoters, etc. You have not considered the past trading patterns that can affect the future share price. Insufficient knowledge and inexpertly applied trading decisions often result in financial loss.
  • You have a trading mindset and try to take profits too early. As mentioned before, investing in equities is patiently playing a long game. Otherwise, you end up selling the good shares in your portfolio only to suffer opportunity losses.
  • You act on tips received from anyone, including your neighbours and colleagues. Every share tip does not pan out. You should not take investment decisions based on improperly researched information. 
  • You do not diversify your portfolio. When you take a large bet on a single stock or a group of stocks, any fall in those share prices results in significant portfolio loss.
  • You do not place proper stop losses when you buy or sell shares. Stop losses limit the magnitude of financial loss when the share price falls. It also limits losses on the upside if you tried to sell a particular share which you wished to retain.
  • You do not understand the risk or volatility that’s inherent to stocks. Stock investments with a high correlation to the market have a high Beta or market risk. Others risks include business risk, sector-specific risk, and regulatory risk or macroeconomic risk.
  • You have unrealistic expectations of the kind of returns you can earn in a short period. You do not analyse the long-term returns available on a particular stock or its peers in the industry. 

How not to lose money in the stock market?

  • Build your financial skills and expertise

Learn how to assess the fair value of a stock and find the optimal points of entry. Remember, you can never catch a share at its lowest or highest price. Ultimately, buying a particular stock has to be your investment decision.

  • Consult a SEBI-registered financial analyst or portfolio manager

A Securities and Exchange Board of India (SEBI) registered portfolio manager will guide you to make proper decisions regarding the kind of stocks and points of entry.

  • Do not put all your investment bets in one basket

Portfolio theory tells us to diversify. An optimal diversification would be about 15 to 20 stocks. Make sure you diversify your portfolio in different sectors or industries. It should have a proper mix of both momentum and defensive stocks.

  • Develop an investor mentality

Remember, frequent trading results in both opportunity losses and increased costs. Have the confidence to stay invested in your carefully researched stocks.

  • Be rational about your investment return expectations

Do not treat stock investing like gambling. Research the past trends and approximate return ranges before you invest. Also make use of stop-losses otherwise loss-making stocks may end up becoming your legacy stocks. 

  • Diversify at two levels 

It’s essential to not only diversify your stock portfolio but also diversify the asset classes in which you invest. Other asset classes include bonds, commodities, real estate, and gold. Such diversification reduces portfolio risk.

  • Consider an SIP for your equity investment

By opting for a Systematic Investment Plan (SIP), you can benefit from rupee cost averaging that will help you bring down the weighted average cost of investing.

Conclusion

It’s important to approach investing after considering all these points. While equities can give good returns that are inflation-beating and help you meet your long-term financial goals, they also come with market risk on the stocks investments. A diversified portfolio and the right investing strategy and mindset can help you. You can also consult a financial expert who can guide you on making prudent investment decisions based on your risk tolerance and goals.