Stock market losses stem from a lack of knowledge, impatience, and a gambling mentality. The way to protect yourself would be research, patience, and long-term focus.
The stock market is a dynamic place where we see several rags-to-riches stories. It can make an extremely poor person rich, but all good things have a flip side. Several stories about stock market losses make wealthy people extremely poor.
Let’s dive into a few reasons for these losses.
Reasons for Stock Market Losses
The stock market has many reasons for people to lose money. A few of the most popular reasons are as follows:
- Ignorance leads to losses: Investing because of FOMO is a bad idea. Following the crowd blindly is one of the significant reasons for stock market losses. It is never a good idea to follow the advice of your family, friends, or relatives while investing in the stock market.
The only way you can make a profit in the stock market is by doing it yourself. It’s not a very tough job. All you have to do is do a little reading and analysing. Keep reading to learn more about analysing a stock by yourself.
- Treating it as a way to make money overnight: The Greed to be rich and powerful overnight wastes money, time, and energy. Making money while investing takes time. Great investor Warren Buffet made most of his wealth after age 50 by investing long-term.
- Gambling: People often lose their money because of the gambling mentality. The main reason for this mentality is that people depend way too much on the success stories of others, ignoring the failures.
- Not Knowing when to let go: Knowing when to let go is as important as knowing when to buy. Investors often make the mistake of holding for too long.
Sometimes, holding a losing stock and selling a winning stock is not a good idea. Most people do this thinking it will give time for the losing stock to jump up or recover.
You may be limiting the upper-level profit increase and increasing the lower-side risk.
A more significant loss may be waiting for you with the stocks in your portfolio.
It is better to set a specific holding boundary and let go after the stock price goes below your limit.
- Lack of patience: The biggest losers in the stock market are not those who do not find good stocks to invest in. They may have a portfolio that makes them crores.
The ones who do not have the patience to hold on to their stocks for an extended period, i.e., a year or two, are the ones who make the biggest stock market losses.
Also, people who get impatient because of a 20-30% stock loss and sell without waiting for a while may lose a lot of money.
How to protect yourself from Stock market losses?
To avoid stock market losses, it is extremely important to do your research.
To avoid losses, it is essential to have strong fundamentals.
Analysing a company can be broadly classified into fundamental analysis and technical analysis.
- Fundamental Analysis:
Evaluation of the company’s overall health, well-being, stability, performance, and potential risk.
Fundamental analysis includes:- Income statement analysis: revenue growth, profit margins, and earnings per share
- Balance sheet analysis: Debt to equity ratio, Assets, and liabilities
- Cash flow analysis: operating, investing, and financial cash flow
- Ratio analysis: Return to equity, Return to Assets, price-to-earnings ratio, price-to-book ratio, and debt-to-equity ratio.
- Financial health analysis: Invest coverage ratio and debt Coverage ratio
- Technical analysis:
Technical analysis includes studying the Historical price charts to understand and predict the future market movements.
It involves identifying trends using charts, patterns, and moving averages. Traders use candlelight charts for insight. By analyzing chart patterns and employing tools like moving averages, traders can anticipate price direction and potential entry or exit points. Candlestick charts provide detailed insight into market sentiment, enhancing decision-making capabilities.
By integrating fundamental and technical analysis, investors gain a clear picture of companies with respect to market dynamics. Fundamental analysis provides insight into a company’s financial health and long-term prospects, while technical analysis offers real-time market sentiment and short-term trading opportunities.
Together, they form a comprehensive approach to investment decision-making, allowing investors to capitalize on fundamental value and market trends. This holistic approach enhances risk management and decision-making, empowering investors to navigate various market conditions more confidently and effectively.
- Long-term Vs. Short-term Investment
If you are a beginner and have yet to learn about the market, it is better to invest long-term as it cannot go wrong. Investing in the short term needs high caution and knowledge.
Short-term investments done with impatience and greed lead to immense stock market losses. - Make Achievable Goals
Overnight wealth is impossible in the stock market. Even highly experienced traders refrain from doing so; the stock market is advantageous and unpredictable, and you may lose all your wealth if you do not do proper research.
So, it is important to plan wealth-making over time and avoid trying to make wealth overnight.
- Know Your Risk Appetite:
When starting as a beginner, it is always better to set aside a specific sum of money and invest only with that. It can get tempting, and one may want to go deeper into the market, but it is advisable to wait and have patience before putting in large amounts of money.
This becomes an important consideration because we feel we understand everything until we start investing or trading physically. In no time we will lose a lot of money if we don’t practice well before investing high amounts.
Take a break:
Investing is undoubtedly very exciting for beginners, but obsessing over it would only lead to stock market losses. Spend some time with the analysis and study. Once you finish investing, leave it and do something else. It does no good if you check it again and again. You just keep getting anxious.
Conclusion:
It is important to note that to avoid stock market losses, knowledge about the market and patience is important. Conducting thorough research, Setting realistic goals, avoiding FoMo & greed, and having basic knowledge about fundamental and technical analysis are the goals to make wealth in the stock market.