In the world stock market, everyone like to talk about multibaggers and people who created huge wealth like Rakesh Jhunjhunwala. But tell me friends, what about the failure stories? Every year, millions of people in India end up losing money in the stock market. But nobody likes to talk about it.

There is a very good saying: “We can learn more from our failures than the success.”

So in this article, I have curated a list of 7 common mistakes people make in stock market which result in people losing money. And then I have dig deep to identify 5 major human psychology that is the root cause of all the problem.

7 reasons:

1. Investment in Penny stocks: Many people have an obsession with penny stocks. They think that when they invest in penny stock, the downward risk is very low. For example, if they invest in a stock worth Rs 5 then utmost they would lose Rs 5 per share. But the upward potential is huge. Friends, 1 out of 100 penny stock hae upward potential. Rest all have high downward risk. And how much you can lose? You can lose all your money! Infact, I ask many people why they like penny stocks. And many of them said that they like to get high units. This is again a huge misconception. For example, there is a share worth Rs 10. Let’s call it Share A. And there is another share B worth Rs 1000. Now people think that if they invest Rs 10,000 they will get 1000 units of share A and only 10 units of Share B. So lets invest in share A. Folks, this is not the right way to invest. Infact, share price has got nothing to do with valuation. A share worth Rs 10 could still be overvalued than a share worth Rs 10,000. For example, MRF is a classic case. It is currently trading at Rs 90,000. It is still reasonably valued. Yes, it is not overvalued even at Rs 90,000/share. So share price has nothing to do with valuation. Majority of people lose money because they end up investing in penny stocks.

2. No idea of valuation: Valuation? What is valuation? If I ask 100 people, majority of them have no clue about valuation. They just invest because they think that the share is good or someone suggested the share. My friend, valuation is the most important criteria along with the fundamentals of the company. No matter how good a share is, no matter how good the future growth potential is, if the share is super expensive, it won’t give you great return in the future. Majority of people lose money because they end up investing all their money in super expensive stocks without looking at the valuation.

3. Follow the heard: This is the biggest problem in our country. Majority of the people end up investing in companies where their colleagues have invested, friends have invested or relatives have invested. It is like “doobege to saath me”. On a serious note, I have seen many people simply investing on tips from friends, family members or colleagues without even knowing anything about the company. They have this “blind faith”. Again, a major reason of losing money.

4. Look for 52 week low: Many people have the tendency to invest when the stock touches 52 week low. “Yaar aur kitna girega” This is the attitude. Bhaiya, aur bhi gir sakta hai. Majority of the people avoid stocks at 52 week high thinking “Yaar aur kitna badhega”. It doesn’t work like that. You can’t simply avoid a stock just because it is at 52 week high or can’t simply invest just because it is at 52 week low. But on the other side, there are also people who just invest looking at high returns in the past. They invest when the company has already given bumper returns. No, both approaches are wrong. A stock at 52 week low could even fall further if it is fundamentally weak. But if a stock has fallen to 52 week low due to external reasons like COVID and the stock is fundamentally strong then it makes sense to invest. Majority of people end up investing in poor quality stocks at 52 week low. And a stock at 52 week high can either fall or rise based on the fundamentals of the company and future growth prospects.

5. Avoid quality stocks: I don’t understand why but people have this keeda to identify the hidden gems. “Yaar HDFC Bank to sabko pata hai. Kuch aur batao. Titan, Reliance, TCS to sabko pata hai. Kuch aur batao. Ese stock batao jo kisi ko nahi pata.” A big problem! Many people lose money in the stock market because they simply avoid the real gems and keep searching for the hidden gems. Bhaiya, jo acche stock hai wo sakbo pata hai. Aur jo nahi pata hai wo isliye kyoki wo acche nahi h. There is another problem. People not only avoid high quality stocks but end up investing in poor quality stocks and when the share price falls, they invest even more to average out the price. Friends, that is a recipe of disaster.

6. End up investing in day trading and F&O: Many people want to make quick money in the stock market. As a result, people end up doing day trading and even invest in futures & options. Friends, I have already mentioned that day trading is not everyone’s cup of tea. You need to be a professional trader. Many people lose money in stock market as they end up investing money on day trading and specially in F&O by buying huge lots on leverage and even on borrowing money from others. When they lose money, then invest more with a hope to recover their lost money and end up losing even more.

7. Never learn from history: Final reason why people lose money in the stock market is because they don’t learn from history. For example, if today Sensex is at 50,000 people think that it will only go up. But my friend, if you look at the history, you would know that if the market rise, it also fall. And when it falls, it eventually rise. People today are going gaga about technology stocks. They are willing buy technology company at any valuation. I am not saying that they are bad. But if you look at the 2000 dot com bubble, that was the time when every internet company was attracting super expensive valuations even without any profitable business model. Eventually, the bubble burst and people lost money. So don’t just invest in a company because it is a technology company. Look at the financials and business model and ofcourse, the valuation. Likewise, today, everyone want to apply for IPOs. Every IPOs. Not every company that goes for an IPO is good.

5 root causes:

I keep saying that investing is not a science. There is no fixed formula. It is more of an art. If investment was all about finance and numbers, every finance and economic professor would be a millionaire. The biggest factor that decides the success or failure in the stock market is “Human Psychology”.

1. People need thrill. If I give you 2 options of investment: 1st is an Nifty index fund that can give you an average of 10% annual return for next 10 years vs an active mutual fund that can either give 15% return or can also give 5% return. What would you chose? Majority of people would go with active mutual fund. Because if you know an average 10% return then there is no thrill. On the other side, even if there is a slight chance of 15% return then you want to take the chance even though there is huge downside risk. This is the reason why index funds are not so popular in India. On the other side, if I tell you that a stock can give you an average 20% return for the next 10% year vs a stock that can either give 100% return or can also give negative return. Then majority of people would go with 2nd option.

Friends, I love to understand human psychology. In fact, I want to share a brilliant story of how google pay became such a hit in India. When google pay entered in India, people used to transact with Patym. At that time, Paytm used to give cashback. It was a great idea that resulted in the huge success of Paytm. People loved cashback. So earlier, Paytm used to give Rs 100 or Rs 200 as cashback which can be used in another transaction.

But google pay did something extraordinary. Do you know what? The problem with Paytm cashback was that people already knew the amount they would receive. So there was no thrill.

Google pay introduced a “scratch card” system. So you make the payment and get a scratch card. Now this was a billion $ idea. Since people didn't knew about the cashback they would receive, it created a thrill in their mind. And google pay started with giving good cashback. So if someone made a payment of Rs 500 and got a scratch card with a cashback of Rs 100, the person was thrilled. He didn’t expect this. This releases dopamine in the body which is the hormone responsible for happiness. So dopamine is also known as a “feel-good” hormone. So he sharted sharing his google pay experience with friends and over social media. Instantly google pay became a hit. In fact, this strategy was so brilliant that it would cost google pay less than Paytm cashback because later google pay reduced the cashback on scratch card and many times the scratch card would show “better luck next time”. Still, there was a thrill.

And, if you are wondering google pay guys must be genius, this concept is nothing new. We humans have always been thrilled by these scratch cards and hence the concept of lottery has been prevailing in our society for hundreds of years. It is just that google pay has made an online version of it. Later, Paytm also followed the same strategy.

In fact, this dopamine is the main reason why people are glued to social media. The urge to get instant gratification with someone linking your photo. Anyways, let’s not divert from our topic.

If you need thrill, please visit Goa or Vegas. Real investing is boring! It is like watching paint getting dry or watching grass grow.

2. Greed

This is again a big problem. Yaar 10%-15% nahi. 40%-50% waali company batao. Greed is the reason people end up investing huge amount of money when the market is at top. Greed is the reason people even end up borrowing money to invest in the stock market. Greed is the reason people end up investing in penny stocks. Greed is the reason people end up doing day trading and F&O. And greed is the a big reason why people end up losing money!

3. Lack of patience and discipline

“Yaar esa stock batao ki 6 mahine me paisa double ho jaaye”. This statement sums up the mentality of the majority of investors. Everybody wants to get rich but nobody wants to get rich slowly. If you study Warren Buffett, he became a billionaire at the age of 56. But majority of people lack patience in investment. In fact, if they invest in a great stock or mutual fund and it doesn’t give return in the next few months, they end up selling it. Because they don’t have patience. Another factor is discipline. Discipline to invest systematically at various levels in spite of market volatility. Discipline to stay invested in the market. It is not easy. And the majority of people lack discipline.

4. Can’t handle pressure

Fear and greed. These are the too biggest emotions in stock market. When market falls, people become fearful. For example, if someone invests Rs 1 lakh in good stocks and mutual funds and the market falls and the value becomes Rs 70k, the person would panic and exit at the loss. This is a big reason why people lose money in the stock market. They can’t handle the pressure. Friends, you need a lot of conviction to go against the wind and stay invested when the market fall or in fact invest even more during the fall. But conviction comes only from knowledge. That brings us to the final root cause which is lack of knowledge.

5. Lack of knowledge

“Yaar sikhana nahi h. Bas tip de do kisme paisa lagaye.” This is again a major culprit in people ending up losing money. Unfortunately, money management is not a part of school curriculum in India. Nobody teaches it. Nobody like to discuss about it. “Jo ho raha hai hone do”. No wonder, every year millions of people in India end up falling in various financial traps and destroy their financial lives.

I wish to spread the knowledge and educate every Indian about money management so that they don’t fall in any financial trap. Hence, I have create a complete course on everything about money management.

Friends, even I am not perfect. Sometimes, I also get carried away with good stock available at an expensive valuation. So If I know that a stock is really good with great management, great financial and great future, then I sometimes end up buying the stock even if the stock is available at super expensive valuation. Although, I make sure that I don’t buy a lot.

Sometimes, I also get impatient when the stock I invested in does not show a good return. Then I tell myself, “Sahil keep patience. Believe in power of compounding. Do not get carried away.”

Sometimes, I also find it difficult to handle the pressure when I invest in a good stock and the stock price tank. Then again I remind myself, you invested after the research. Now don’t lose your conviction. In fact, if the share price has fallen, then invest more!

Friends, this knowledge is a result of years of research of reading great books, blogs and discussion with people. I have tried to put it in a nutshell. I hope you will appreciate it.

PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".