No there is nothing wrong with your Graha!
Every year lakhs and lakhs of retail investors enter the Stock Market with a dream of earning big money. But for some reason most new investors end up losing money. Have you ever wondered why that’s the case? Here are the biggest reasons why most retail investors end up losing money.
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Buying stocks without any research
Most retail investors buy stocks without any prior research. People do more research before buying aloo and pyaaz than they do for buying a stock. People fight the vegetable vendor for free Dhaniya yet they are willing to overpay for stocks. Rather than understanding about the company, checking company’s results or the stock chart people simply ask their friends and colleagues about the latest “best” stock and put all their life savings into it. People should treat their stock purchase similar to buying a new laptop. Check all the features, quality and cost before buying! Proper research (whether using fundamental analysis or technical analysis) should be done before buying any stock.
If you are completely new to the stock market and have no idea what stock to buy, check out this post – How to select your very first Stock?
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Buying stocks based on news/rating agency’s recommendations
This is a follow up to the first point. Most retail investors look up business news/rating agency reports and blindly follow their recommendations. Let me ask you this. If everyone is watching the same news/reports and if everyone is making the same purchase, then who will actually make the money?
Answer : Big funds who buy the shares first and sell on reaching their targets. Big funds follow these news/reports and dump the stock soon after enough retailers have entered.
Business news and rating agency recommendations are also mostly short term views which should be taken with a grain of salt. The reality is – no news channel or rating agency recommendations will provide you good stocks to invest for long term and become wealthy. Because there aren’t new good stocks which come up every day. News channels have a program to sell and therefore will recommend new shares every day regardless of the quality of the shares!
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Scared of volatility
Volatility is one of the biggest reasons why retail investors lose money. Watching your hard-earned money suddenly go down in a market correction is enough to dishearten even the most experienced investor. However when the veteran investors are buying more stocks because everything is on sale, new retail investors end up selling their stocks taking heavy losses.
On one hand there can be extreme euphoria regarding a stock or an index which is a good time to book profits. On the other hand, there can be complete despair in the market which allows experienced investors to buy stocks on a sale. Without volatility it will be very difficult to find out a good entry and exit strategy. So volatility is one of your best friend! Long term investors need to understand that the markets go higher and higher over a long period of time. Here is the chart of Nifty index over the last 25 years which clearly shows that the markets go up in value over a long time.
The best time to accumulate stocks is when it seems the whole world is on fire! That’s when everything is available on sale.
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Investing into small or microcap companies
For most newcomers in the markets it makes sense to invest in established companies which have been operating in the market for decades and making lots of profit for their shareholders. Most such companies are largecaps (companies with market capitalization of Rs. 20,000 crores or more are considered largecaps) which have grown over decades and will most likely continue to do well. However instead of investing in well established companies with good profitability, most newcomers get attracted by smaller companies due to a few reasons
- Smallcaps generally have lower stock price – Just because some share is trading at a low price doesn’t mean it is a good quality share. A Rs. 10 stock is in no way better than a Rs. 2000 stock (generally it is opposite). For some reason retail investors think that it is much easier for a Rs. 10 stock to double compared to a Rs. 2000 stock. That is ABSOLUTELY not the case!
- Most small cap shares are volatile – Small cap shares due to their low market caps can rise or fall a lot and are extremely volatile. Most newcomers want to get rich quick and therefore get trapped in such companies.
- Most small cap shares have a turnaround story – Many newcomers get trapped into a story which is portrayed regarding the potential turnaround which the company can have. The truth is that most companies are unable to turnaround their business and most smallcap stocks continue to go down eroding investor’s wealth.
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Mixing trading and investing
Here is a familiar scenario –
You buy a stock for short term hoping to make a quick 10% gain. But the stock instead goes down by 5%. You have not used a stop loss because you are “very sure” about the share. You continue to hold on to the stock. The stock fall another 5%. Now instead of selling the stock and getting out of a bad trade, you decide to double down and average your stock (i.e. buy more quantities at a lower price). The stock keeps on falling and is now around 20% below your buy price. Suddenly you switch from a trader to a long term investor.
If the above scenario seems familiar that’s because most retail investors mix trading and investing. There is absolutely no reason to become a long-term investor just because your stock is falling. You will be better off to just sell a losing trade and focus on your next trade. You do not want losers in your portfolio. You want more winners!
To learn more about this, visit – Why ‘average’ thinking doesn’t work in the Stock Market?
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Investing like a Gambler
Have you ever thought this –
I will put only Rs. 5000 into this penny share. If a miracle happens, I will be rich.
Now compare it with this thought –
I will bet only Rs. 5000. If both dice show 6s, I will be rich.
The reason both of these ideas look similar is because they ARE similar! Every year few lottery winners get rich but nobody has created wealth by winning the lottery. Investing into a great company and getting a good return over and over for multiple years is a much more reliable way towards wealth than investing into a penny share and praying to God for a miracle.
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Lack of diversification
Diversification is one of the key ways in which investors protect their capital. A lot of new investors wonder – Why diversify if I can buy a couple of good companies? The answer is simple. Even if you own the world’s best company, there is a huge risk which you take without diversification. Even the best companies have problems! What if the company is unable to adapt to the changing world? What if the sector to which the company belongs is facing hardships? Or what if the company promoters commit a fraud or a scam?? All of this can happen to even the biggest and best companies in the world. Combined with the fact that such crashes in stock price happen at a very quick speed which doesn’t provide any opportunity for retail investors to exit, having a concentrated portfolio is simply playing with fire.
Let’s suppose you own only two stocks (50% each). Both stocks are good companies with outstanding fundamentals and steady growth. But if one company faces any problems and the stock goes down by 50% (not uncommon at all), you suddenly lose 25% of your entire portfolio! Creating a good portfolio of 20-25 good companies is the best way for retail investors to invest in the stock market. This is a reliable way to make money in the Stock market. You are protected even if one of your stocks crashes!
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Lack of patience
Most retail investors have this problem when they enter into the Stock Market. Stock Market is not a money making machine which will make you rich overnight, rather this is a place which rewards patient investors. Most investors enter the Stock Market, make a few mistakes, think that Stock Market is a casino and then leave with major losses. Even if you have some of the best stocks in the market nobody else can make you hold those great stocks with patience. Major money is made in the market just by identifying great companies and sitting on the shares for a long time. If you own a great business, why would you sell it?
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DISCLAIMER : I am not a financial advisor. I am not for or against any stocks mentioned in this post. Please consult your financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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