7 reasons why people lose money in the stock market?

As an investor, everyone wants to invest in top stocks in India. In fact, the Indian stock market has grown by a CAGR of 13.5% in the last 30 years. In simple terms, Rs 1 lakh invest 30 years ago would have become Rs 45 lakh! The same money kept in FD would have given a return of ~6 lakh post-tax.

Yet, every year, many investors end up losing money in the stock market. With extensive research, I have identified 7 reasons why investors end up losing money in the stock market:

  1. Investment without knowledge. Many retail investors have no clue about how to select the stock. They blindly invest based on tips from friends, colleagues, trading tip groups on social media like WhatsApp, Telegram, Facebook, etc. They end up investing in fundamentally weak companies with poor growth, poor profitability, high debt, and high valuations. As a result, they lose their money.
  2. Investment in penny stock. Retail investors get too greedy and end up investing in penny stocks. They think that penny stocks can give multi-bagger returns. While there are some penny stocks that do well, most of them would result in loss. Many of these penny stocks are driven by operators. Since they are small companies, it is easy to manipulate their prices. These operators buy huge quantities which increases the share price. This creates hype in the retail investors' community and they end up investing. Eventually, the operator exit at higher level and the stock price fall. As a result, retail investors lose their money.
  3. Lack of patience. The moment they invest, retails investors expect multifold returns in no time. If they don’t get the returns, they panic and sell. They don’t understand that stock investment requires patience. When you invest in good companies, you need to wait patiently. But most of the retail investors do not have the patience.
  4. Lack of conviction. For example, even if they invest in a good stock and the stock price falls, they would not have the conviction to stay invested. In fact, if the stock is of high quality, they should buy even more stocks on every fall. But retail investors would start doubting their investment decision and exit from the market.
  5. Investment when the market is at its peak. This is one of the major reasons why retail investors lose money. Most of the retail investors would start investing when the market is at high. The reason is “attractive historical return”. When the market is at its peak, the historical returns look good. The retail investors would invest thinking that they will get the same returns in the future. But when the markets are at high, the valuations become overstretched and the investor should be cautious. The better time is to invest when the markets are down. But falling market makes the investor fearful and they avoid investment. As a result, they lose the opportunity to earn good returns in the long term.
  6. Too much greed. Greed is the biggest enemy of investors. When retail investors start investing and see a good return on investment, they get too greedy and end up investing in high-risk instruments like futures and options. Due to the lack of knowledge, they end up investing based on tips. That’s pure gambling. In most cases, investors lose money.
  7. They do not diversify. Many investors end up investing a huge chunk of money in a single stock. If the stock fall, they lose money.
What is your experience with the stock market? Do you know how to pick quality stocks? I personally believe that stock selection is not rocket science. You just need to control your emotions and invest for the long term.

To learn about how to pick quality stocks, you can explore my video course.

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