Why do people lose money while investing in stocks?

Investing in the stock market is one of the best ways to build wealth over time. However, losing money in the short term is common. Investment values fluctuate. Investing requires patience rather than panicking if the value of your portfolio falls.

Panic selling, hoarding funds, and trading rapidly during volatile markets - investors frequently make several errors that might harm them in the long run. Know how to recognise (and avoid!) the most prevalent negative behaviours.

Fear during volatility

When fear takes over, every stock market participant gets blind. Everyone tends to forget that stocks can rise again as well. There is despair and pessimism all around, and everyone is seeking the safety of capital.

Here, a rational thinking mind goes for a vacation, and everyone has forecasts about stocks falling more from here on. At this stage, most investors sell their stocks in losses, ignoring the sound health of the underlying businesses these companies have.

Legendary investor Warren Buffet says that ‘the stock market is a device for transferring wealth from the impatient to the patient.’ And this is where fear plays a role!

Falling prey to tips

Another way to blow up one’s capital is to take action on stock tips provided by brokers, friends, relatives, or even colleagues at work. While acting on such stock tips, it is your broker who’s making money, and not you! The reason is that these stock tips are based on speculation rather than sound financial research.

Chasing hot stocks/sectors

Peter Lynch, who was responsible for managing Fidelity Magellan Mutual Fund, one of the best performing mutual funds in the USA, says he tries to avoid investing in stocks in the hottest sectors. Hot stocks and industries always remain on his avoid list. Stocks like Reliance Communications, Suzlon, and DHFL were once the hottest stocks among the investing community. No one in their wildest dreams would’ve thought about the condition in which they are today! Because everyone starts talking about some select names, more investors feel they should own it, adding more steam to it. If the multibagger stocks are to be found, they can be found among the less popular small-cap and microcap stocks, not amongst the ones which everyone is talking about.

Don’t go with the trend if you want to make money in the markets. Make a solid investing strategy instead, and stick to it.

IPOs - easy money?

There is a general tendency among investors that one can lose no money by investing in companies’ initial public offerings (IPOs). Everyone thinks the public issue will open at a premium to the issue price, and they can exit their holdings on a listing day by selling at higher prices.

But this is not the case. Numerous companies make stock market debuts by listing at a discount to the issue price. And there are many which are still at levels below the issue price. Although IPOs of undervalued companies with strong business fundamentals provide good opportunities to make money, investors don’t need to count on every new IPO.

Impatience

Taking investment actions without giving a second thought can land you in losses. Not only do novice investors lack this attribute, but even legendary investors find it challenging to master this quality. Such is the dominance of emotions over the human mind. Even if you purchase shares of companies you see around yourself and keep them for long enough, you are bound to achieve financial freedom!

Your best bet is to stay put and wait for your investments to recover if you don’t want to lose money during market volatility.

Selling winners and riding losers

This is one of the most common and harmful mistakes that investors make. They usually focus on winners and book profits when the stock price increases. On the other hand, they pay no attention to what’s going on with the losing bets.

So, you can’t enjoy the profits from the winning bets with notional losses in your portfolio. Not just that, by holding on to the losing bets, your capital is being blocked, and you are missing out on substantial money-making opportunities.

Leverage - double-edged sword

If it works in favour, money-making can be magnified. But if it goes against someone, it can force him/her on the verge of bankruptcy.

If the margin is used for investing in stocks, it can work wonders in a bull market. But if a sudden surge in volatility results in stock prices going against us, it can lead to margin calls from the broker. And once this cycle starts, troubles increase, as it is a vicious one. The stock market is a good teacher. It teaches us to stay on the ground.

Losses on investments hurt, but if investors keep their eyes on their objective rather than dwelling over their monthly account statements, they will probably do better in the long term.

(The writer is the founder of Teji
Mandi, a portfolio advisory startup)