It it were that easy, everyone would make money in the stock market!
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You own 2 stocks – stock A and stock B. You have invested equal amount of money in both the stocks, say Rs. 100 each.
Investment amount
Stock A – Rs. 100
Stock B – Rs. 100
Suppose after one year stock A gives you 50% returns and stock B gives you -50% returns.
Current amount
Stock A – Rs. 150 (50% capital gain)
Stock B – Rs. 50 (50% capital loss)
Which one would you sell? You need to sell a stock because you need money.
Almost everyone would choose to sell Stock A. It seems obvious right?
“If I sell my Stock A, I make 50% profit. This stock might fall in the future and I will lose my profits.”
“If I sell Stock B, I will take a loss of 50%! Why sell now when I can wait for the stock to at least come back to Rs. 100 and then sell for no profit and no loss.”
If you had the exact same thoughts in your head, then you are an average thinker. I do not mean any disrespect when I call this ‘average’ thinking. It is average because everyone will think in the exact same manner and it seems like the logical thing to do. And that is exactly why most people lose money in the Stock Market!
Let me give you another example. You own 2 businesses – Business A and Business B.
Business A has grown to be a profit generating business
Business B has grown to be a loss making business
Now if you have to sell one of the businesses because you need money, which one would you sell?
Pretty sure everyone wants to sell off Business B which is losing money. This is the exact opposite of the decision which most people will take in terms of stocks.
Every single stock listed in the stock market has a company behind it which makes or loses money doing business. So why is it that when we pick and choose stocks we always keep the losers and sell off our winners? And when we choose business we always keep the winners and sell off our losers?
Because most people think of Stock Market in the similar lines as gambling! Stocks are not some kind of lottery which you buy and pray to God that you win. Every stock has a business behind it and the stock (in the long term) performs similar to how the business performs. Strong companies grow bigger and their stock price increases, weak companies lose money and even go bankrupt and their stock price decreases.
So if you consistently want to make money in the Stock Market, make this a habit – Always keep your winners and sell off your losers. Buy good businesses and increase your holding in good businesses. Sell bad businesses and do not keep on adding them because they are available cheap. It is likely that they will be available for cheaper later!
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DISCLAIMER : I am not a financial advisor. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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