Stock market gives you and opportunity to invest in numerous companies and let your wealth grow over time (if you have the sense, capability and patience to hold the stocks you own). A person cannot be present everywhere and perform all sorts of works but there is no limitation to the number of companies which you can invest on and own a part of it. The idea of earning from stock market and amassing wealth from stocks is very appealing idea for those who aspire to have a second source of income or free themselves from the 10-4 job they hate doing just to make their ends meet. But, not everyone makes money from the stock market. Here are top five reasons why people suffer losses in the stock market.
1. Watching the portfolio every minute
When you buy a house or a piece of land, you don't intend to sell it within the next three months. Though at some times, you get a great deal for your property in a very short period after buying, you'll have to wait at least 5-6 years for the value of your property to be appreciated. But, people are shortsighted when it comes to the matter of stocks. They keep on watching the value of their stocks everyday even when they do not intend to sell it. When they see the value of your assets declining, that is a painful experience and they want to stop that. In a fearful state, they sell their stocks in loss only to remorse later. Will you sell your house you bought for 1 crores for just 80 lakhs if someone offers you that much? That is what the market is offering you. But you do not sell. You'll wait until someone offers you at least 1.5 crores or more, or 1 crores and ten lakhs at least. But, you do not consider the stocks you own as your assets. You would be forced to sell them at cheaper price if you have bought with money that you need urgently in the near future or with some borrowed money.
2. Using excess leverage or using borrowed money
All borrowed money comes with a promise to return the money at some date. People buy from borrowed money with a hope that the stock prices will go up till the time they need to repay back and when they pay back, they will make some profit. But not every time your guess is correct, even when it is correct, the time it takes to be correct may be a bit longer than you had expected. You cannot make the creditor wait till the market rises high again, you'll be forced to sell and book the loss.
3. Being unrealistically optimistic
In every business, there is some inherent risk. Things go wrong and problems appear all of a sudden. But people during rising stock market indices think the market will rise forever and buy at ridiculously high prices with a hope that some greater fool will buy his stocks at a higher price. This will eventually cease and someone will be holding the stocks which are priced too high than their actual worth.
4. Copying others without knowing their whole stories and even their own
People see others making a lot of money from the stock market in a very short time. They believe the lies they see in the social media and news websites. Let's say someone(CLEVER FOX) has bought 10000 units of stocks of a company at Rs. 5000 each. Seeing this, thinking the stock must be good, another fellow(ENVIOUS MONKEY) too bought the company's 1000 units stocks at Rs. 5000 each. The ENVIOUS MONKEY doesn't know that CLEVER FOX already had 10000 units of the same company already bought at face value (i.e Rs. 100 each) during the initial public offering. So, the weighted average cost of capital or price per share for one stock is 2550 only for the CLEVER FOX. But, the cost per share is 5000 for the ENVIOUS MONKEY. When the market goes down to 4000 per share of that company, the CLEVER FOX exits the market selling at 4000 and still making huge profit. The ENVIOUS MONKEY is left in a holding position at loss.
5. Keeping their time frames too short
If you hold any stock ( which you bought at a fundamentally reasonable price, i.e below PBV ratio 2 and P/E ratio of 20) for 10 years in the Nepalese stock market, or any stock market of the world, you'd never be in a loss even after adjusting the inflation and the returns from bonds or risk free investments.
But people who cannot hold the stocks till that time frame are bound to lose. Moreover staying in the market is not only sufficient, you have got to keep adding stocks at the times when they hit their 52 weeks low.
If you consider these points and invest in the stocks, you'll be financially free very soon and will never have to bear loss in stocks.
HAPPY INVESTING. STAY PATIENT!! GET RICHER EVERYDAY!!!
