Bears and Fools - Who are they?

A lot of investors loose money in stock markets.

This post is going to explain the various ways in which people usually incur losses in the stock markets.

Investors loose money in stock markets sometimes due to their own mistakes and sometimes due to reasons which are beyond their control and predictions.  However, sufficient care and common sense makes some investors special and they excel in the stock market and beat the market

Although  the investors know about bad fundamentals of the company, their greed and affinity for the penny stocks caused huge losses to investor's wealth.  

            Many investors lose money in stock market. There are many ways by which you can lose money. Those investors who had lost money in stock market may agree to the various ways that I am going to explain in my first blog post. There are many risks involved in Stock market. The returns offered by the stock market rewards the risks that are associated with it.There are no specific and written rules for fetching good returns from the stock market. Unless and until we are able to manage these risks carefully and successfully, we are not going to get the rewards in the form of returns from the stock market. Below mentioned are the various ways of losing money in the stock market. By overriding these ways, you can make money in the stock market.

Investing in Penny stocks or Penny shares can lead to loss of money  in stock market. 

Most of the investors loose money by investing in Penny stocks ( click on the link to know more about penny stocks). Penny stocks are stocks which are cheap in price and lack fundamentals. These companies believe in giving news to stock markets and artificially raise the stock prices. Much of the penny shares are traded below Rs.25. Some of the penny stocks even trade below Rs.1. These penny stocks’s price increases abnormally at the fag end of the Bull Run.

Normally retail investors enter into the market during the last part of the bull run. Seeing the low price of the Penny stocks, they buy penny stocks and get trapped into the stocks. When the profit booking happens, the penny stocks tend to fall in the lower circuits and the retail investors are unable to sell the shares of penny companies because of their highly illiquid nature.

Always stick to companies whose business you can understand fundamentally as well as technically. This is the core principle of value investing.

Margin trading can lead to losses

Another major factor behind losing money in the stock market is Margin Trading ( click on the link to know more about Margin Trading). Margin trading is buying and selling stocks worth 5 - 10 times of their capital in a single day and settling the positions on the same day. Margin trading is in other words is, gulping more than what you can swallow. Suppose you have Rs.10,000 in your accounts, the broker will allow you to buy 5 to 10 times of your money, in this case it comes to around Rs.50,000 to Rs.100,000. It is done in intraday trading.

For example, if you do intraday trading with Rs.10,000 only, and suppose you incur a loss of 1%, then it will come out to be Rs.100. You will be getting another 100 chances to re-gain the loss. But if you do intraday trading with the margin money, that is with Rs.100,000 and suffer a loss of 1%, then it will be around Rs.1000. Your account balance diminishes by Rs.1000. In 10 to 15 intraday trades, your capital will diminish.

               No one really knows the future. Determining the price of an equity or commodity for intraday is almost impossible. Even the technical indicators can't guarantee success. Day trading or intraday trading is like a one day date in real life. You don't know much about the partner. But value investing in stock market is like marriage. You will be going through all the details of your partner before marriage.

               You have to be the Almighty to predict the future. You are going to fail for almost 9 out of 10 times in the intraday trading when you start. You will never immediately get a chance to regain the money lost in intraday trading, moreover you will have to get in more capital if you want to regain the money lost which will lead to desperation, which in turn will lead to a stock market trap.  Avoid day trading / intraday trading as it will lead to losses and is not a practise which can be followed in a  long run.

Greed of the Investor 

Greed of the investor is one of the major factors for getting losses in stock market. Some investors are not satisfied with 25% returns, not even with 100% returns from stock market. A return of 20% from the stock markets is considered healthy. When one gets a healthy return, asking for more and more returns tends to make one desperate which leads to losses and may prove to be harmful for the portfolio. Returns always go along with the ground realities like inflation, market trends, industry performance etc. As far as I can remember only value investing can beat the market and give you amazing returns.

Usually, only one in a thousands stocks turn out to be a multi-bagger. Though considering the present bull run in the market many large-cap, mid-cap and small-cap turned out to be multi-baggers. When you get the return from the stock market, which justifies the risks that you have taken, exit the stock and enjoy the returns and patiently wait for another opportunity to invest in.

The very obvious stock market principle is 'buy low and sell high'. 'But majority of investors buy high and sell low'. Always wait for the low prices during market crashes or a news.

Not using Stop Loss

Stop Loss Order ( click on the link to know more about Stop Loss Order) is a type of order used to limit an investor's loss on a position in a security. In times when the price of a certain security drastically changes, investors may not get the relevant time to sell their security to minimise the loss. It  may aggravate their losses. By using Stop Loss Order, one can lock their losses.

Many investors are very shy to use Stop Loss Order. Even in long term investments, one should consider putting a stop loss. When one is trading intraday, one should strictly use Stop Loss Order. It is also to be kept in mind that the Stop Loss Order used should have sufficient room for the stock price fluctuations. In other words, if you buy a stock at Rs.100, then you should not be placing the Stop Loss Order at Rs.99.75 as it may leave no room for the price fluctuations. Your appetite for the risk should determine the Stop Loss Order.

Avoiding the presence of other people while trading

Its always better to sit at home and trade online. If you're trading in the presence of certain people, it is possible that you may have ego issues if you book profit or incur a loss. At this time, it is very much possible that you may carry out wrong trades in order to neutralise the losses and book profits. You will tend to prove a point in front of others. You will be prone to other people's advice and stock tips. There is always a tendency to follow others in a group.

 These things are dangerous. When investing or trading, your mind should be calm, without any prejudice and fear or anger. When you are at home, you are the sole factor behind your decision, you know that you are responsible for the losses you incur and for the profits you book. You have the cushion of your own time and your own place for selecting the time of purchase of securities after a proper analysis.

Blindly following the so-called experts and the business media

In stock markets all over the world, experts and business medias have destroyed lot of investor's wealth. Experts recommend stocks to the common investors. Common retail investors blindly follow the expert's advice and buy the scripts without measuring the pros and cons of the same. Buy a stock only if, you are satisfied with the fundamentals. Some experts have their own hidden agendas like paid announcements, bonding with the company management, some have exposure in the stocks they recommend.

When investors buy the stocks, the experts sell the stocks in order to book profits which arise from the mass buying of the stock. Not all experts are worthless though. I do follow a though ( not completely, I reply on my own judgement) Some do give a very good and unbiased recommendation. It is an investor's job to find out what is good and what is bad. When Sensex had hit 21000, a lot of so called experts are were telling the investors that the Sensex would touch 35000. But when the same Sensex touched 17000, the same experts were telling that the Sensex will touch 14000. A lot of them literally make baseless recommendations. Even on the day of Satyam fiasco in India, some brokers were recommend ing Satyam on that particular day. Always try to study the fundamentals of the company from as many sources as possible. If you don't have the time to study a company, invest your money in a mutual fund. Switch off the volume of the TV if you are watching any business channel while you are trading in the stock market.

There are lot of investment tips and SMS flowing from all directions. Some claim that they have insider information. Some guarantee doubling your money. Please  avoid these recommendations. If you want to grow your money don't go with these recommendations rather study about the market, study about the the process works and then invest on the basis on your study.

Putting all the investment in a single company/no diversification      

As said by the legendary investor and my ideal The Oracle of Omaha, Warren Buffet (I'll do another post on Warren Buffet) , On Investments

                                   "Do not put all eggs in one basket"

 Majority of investors put all their investment in a single company. It is like a lottery, if it performs, you win, if not, your investments are gone. When you diversify your investment across different sectors, in different companies chances are that after averaging the returns you would likely succeed or would profit. If one or two sector under performs, chances are that other sectors would grow.

Investing money sourced from Loans, borrowings.

Some investors tend to take loan from banks to invest in the stock market. According to me "It is a strict NO". If the investment falters, then repaying the  loans is difficult. You will land up in a difficult situation.

Always invest with your money, your disposable income (Savings - Taxes) should be used for investing in stock market. And if you follow the mantra "Spend after Saving" over "Save after spending money" you'd be thanking me after a few years. Also, the money which you would need in short term, that is say, three months to one year, should not be used for investing in securities. When investing in stock market, you should have a time horizon of minimum 1 year to 5 year or even more.

If you get sufficient returns from the stock market which justifies the risk taken and the profit expected even after 6 months of investing, exit the investment and enjoy the profit. Don't regret!!! There is no specified rule regarding the tenure of investments.

Investing just for the sake of investing in stock market 

Many investors loose money in the stock market because the investors put no effort to check their investments, they invest just for the sake of investing.. When you invest, invest with a purpose. You should be investing in the business of the company not in the name. You should know the business of the company and its future prospects. In a nutshell, you should understand the business of the company. You should be confident about the business opportunities of the company, you should be confident of the future prospect of the company.

Never invest in companies whose business you cannot understand. Treat the investment like a marriage. Before marriage, you tend to collect  all the  possible information about your partner. In the same way, collect all the information about the company in which you are going to invest your hard earned money. You are  paying Rs.100 to buy an apple as in that case you would eat and and satiate your hunger, you're paying to grow your money and believe me if you loose your money in the stock market when you start investing because of your carelessness, you are leading yourself to the stock market trap. Only if you are satisfied with the share price, think about investing in the company. If the price does not satisfy you, discard it.

Belief that Stock Market is easy money

There is no easy money in stock market nor is anywhere else. Money can be made only with patience, care and efforts. Your greed and lack of patience coupled with ignorance can make your investment's value decrease to zero in no time. If you want to invest successfully, you have to have  patience and the ability  and mind set to suffer losses. Unlike the successful investors, the common investors want to double the investment in no time. They tend to shuffle their portfolios, make useless and unthoughtful strategies which eventually leads to losses.

Patience and perseverance make an ideal investor. During the time of crashes, your investment value may decreases by 40%, don't forget crashes are the best time to buy stocks. Don't follow the herd. It may come back to its original price or even more. The only thing is you must have the courage, patience and capacity to hold the loss making investment.

Investments based on false news and rumours 

Never invest in a company based on  news or rumors. Generally when a news about the company comes out in the media, the stock price tends to get affected. Common investors are the main losers in this case.

General rule in the market is "Buy on rumors, Sell on the news". Now you must be thinking how to differentiate between a news and a rumour, its easy go check the financials, apply your common sense and your through. Normally, the investors who are access the insider news about the company are the first one's to invest, then FII's, Mutual funds, at last our retail investors. Retail investors invest in the company when the news is out and the market has already reacted to the news. At that time all the other sections of the investing fraternity sell the stock and the retail investors get trapped in this cycle.

Investing in low quality or low grade IPO

Common investors wanting to grow their money invest in IPO's of low grade companies and consequently lose their money. Generally, low quality or junk companies come with an IPO to raise money during the bull period of stock markets so that they can manage to get a full subscription to their IPO and manage to raise a good amount of money.  

On the first day of stock listing, stock can go anywhere. This 'anywhere' means, it can go upwards to 100% or even more or downwards. Wherever it goes, investors are left at the mercy of stock market.

So never invest in low grade or low quality companies’ IPO until and unless you have some full proof insider information. Never invest in a company's IPO whose business is not easy to understand. Never invest in a IPO just for the sake of it being cheap in price.

       

So these were some basic don't in the stock market which every rookie should follow. Don't be The Pig. There is this very famous saying in the stock market

"Bulls make money, Bears make money but Pigs just get slaughtered"

Don't be the PIG by following the herd. Study, make efforts and then invest.