Many investors enter the stock market with so much confidence. They get lured from success stories without knowing that it’s not always a bed of roses. Some end up asking: why do I keep losing money in the stock market? While bad trades are normal from time to time, losing your capital uncontrollably is a serious matter. You’re doing something wrong, and you need to fix it before it eats up all your cash.
Losing money on your investments is surely a big punch in the gut. No one wants to see their hard-earned money go down the drain. Still, there are ways to bounce back. You just have to know what you’re doing wrong so that you can employ the right solution.
Why do I keep losing money in the stock market?
Most of the time, it’s almost impossible to see our mistakes when we are the only ones looking. If you’re losing money on stocks and don’t know why, the following are the most common scenarios:
1. You ignore the market cycles
The stock market is perpetually changing. Prices fluctuate, economic cycles decline and expand, and not all trades will be good. We can all learn a thing or two from the Robinhood craze that has been moving the Indian stock market.
Stocks, especially those of large companies, are highly affected by global events. For example, during the 9/11 attacks, the Dow’s value fell by 7.1%. It’s the biggest loss to the said market index at that time.
Another example here is the stock market crash of 1992 in India. Harshad Mehta, an infamous stockbroker, manipulated the stock market and took an elaborate securities scam. It’s deemed as the largest market crash in India by percentage done single-handedly by Mehta.
Being blind to what’s happening in the international market is guaranteed to make you lose money. Your investments will be ticking time bombs that will set off once a big global event happened.
Natural disasters, terrorism, healthcare crises, and civil unrest can all make the stock market crash. For example, if a country announced that it would venture into military equipment to combat terrorism, it will likely affect the stocks of military equipment manufacturers.
In short, you need to be in touch with economic realities. You simply can’t invest, trade, and think that it will all go well. That’s a financial fantasy you have to get out of if you want to stop losing money.
2. You buy on margin
When a trader buys stocks on margin, he borrows a large sum of money from a broker. He can also pool the borrowed money with his own capital to make the investment bigger. After that, the trader will sell the stocks bought through margin. Once the borrowed money has been repaid, the trader will earn a small profit.
In some cases, this strategy works, especially for those who don’t have the capital but has excellent trading skills. Also, this strategy can be profitable if you buy on margin during a slump and sells on time during an upswing. However, buying on margin can also turn disastrous.
Sudden market crashes happen. If you buy on margin under a large borrowed amount, a market crash will wipe out your loaned cash and capital. With that, you’ll have to pay the broker your borrowed amount, thus lost money.
Aside from losing your capital, you’re also left with the obligation to pay off your debts. It’s a double-whammy that traders would never want to experience.
3. You don’t study new strategies.
Being stagnant and not learning new trading strategies will surely take its toll on your earnings soon. Market indexes change, and so are the techniques needed to earn from it. Being too comfortable and stuck in your comfort zone will make you lose money.
While you buy more stocks and explore other companies, you should pair them with new techniques. Set up a dummy trade account where you can test your new trading strategies. This will allow you to check its profitability, but without compromising a large capital.
Most of all, don’t follow recommendations blindly, especially if they came from someone with little background in stock trading. Take advice with a grain of salt and do your research.
Always go back to the charts and your trading journal. This will be your map, which will guide you on past market trends, which could impact your current market.
As to how the acclaimed author William Burroughs put it, “when you stop growing, you start dying”. I think traders can learn a thing or two on that line.
4. You don’t diversify your portfolio.
Diversifying your portfolio isn’t just for the glitz of owning shares in various companies. It’s also a good way to survive major market crashes. By diversifying your portfolio, you’ll have bankable investments that can withstand the test of time. While the other stocks experience a dip, you can use the others to stay afloat.
A diversified portfolio allows you to manage non-market risk. When we say non-market risks, it refers to the aspects you can control as the trader.
However, you should avoid over-diversifying as this can expose you to losses. A portfolio of 20 stocks is much easier to monitor than a 50-stock roster. As much as a big aspect of the stock market is a numbers game, it’s not always true when it comes to portfolio diversification.
Moreover, you shouldn’t just buy more stocks for the sake of doing so. You must pick companies you think have topnotch performance and high potential yields.
If you’re a beginner, start with 5 stocks, then grow it to 10. This should be manageable for most traders.
5. You let emotions run high.
When it comes to stock investments, letting your emotions rule decision-making is guaranteed to consume your capital. You have to master trading psychology to avoid making bad trades.
Fear, greed, and impatience are your enemies when trading. Using the herd mentality is the worst thing you can do while investing in stocks. In this setup, you tend to follow where everyone else is going. You basically let a group dictate your choices, which can be catastrophic if that group turns out to be inexperienced traders.
You have to know how to differentiate between rumors and facts. When in doubt, always go back to the charts and assess your emotions before making another trade.
To be fair, controlling one’s emotions is probably one of the hardest aspects of being a trader. It’s easy to make emotional decisions, especially in the middle of a big loss.
6. You trade to get rich quickly.
Who doesn’t want to earn money lakh after lakh? But as much as you want to get rich quickly, making hasty decisions will make you lose more money. If someone told you you’re going to become rich in just a few months of trading, you should run and never look back. Such a guarantee is a tell-tale sign of an investment scam.
The goal here is to make your losses smaller than your actual gains. Aiming for home runs right away while trading may turn catastrophic on your stock game. Be patient and study the markets before making a deal.
7. You don’t have a mentor.
Lastly, a trader can prevent losing money on stocks if he has a mentor to serve as another pair of eyes on his strategies. As much as many traders can wing it on their own, having a mentor offers a myriad of advantages.
Experienced traders can help you prevent common pitfalls where investors tend to lose money. It’s crucial, especially for beginners, to have a mentor to speed up their learning. This will let you achieve progress in a few weeks what will take you months on your own.
You can enroll in a trading academy or contact someone you know who’s in trading. Make sure that the person has extensive experience with the stocks you currently own.
How to stop losing money in stocks
If you want to put a halt to your slump, here are some tips that could help:
✔️Aim to diversify
To reduce the risk of losing money during a market crash, it’s important to diversify your portfolio. Consider investing in multiple companies, but make sure that you only do so in the amount you can manage.
Diversifying your portfolio can be done slowly so that you can assess your risk appetite. This will also let you test your strategies as well as pick the right company to put your money on.
✔️Try to avoid high leverage.
While it’s true that high-risk investments yield the highest returns, they could also expose you to massive losses.
Aside from potential market crashes, brokers charge overnight or daily fees, which is much higher on high-leverage trades.
We’re not saying you should avoid leverage. You just have to use it wisely to your advantage; otherwise, it will drain your capital.
✔️Don’t go big or go home.
Many traders get victimized by the mindset of “go big or go home”. This exposes you to unnecessary risk, especially if the trading decision is fueled by emotions.
Aside from that, you shouldn’t time the market. Waiting for the best price will keep you stuck. Eventually, when the market crashes, you’ll lose a lot of money.
✔️Stop chasing money
If you had a big loss, you shouldn’t chase it by gambling on a high-leverage trade. Being too impatient or excited may add up to your losses.
Consider buying on the dip then selling on the high. If you can tolerate it, consider holding on to your stock for a specific period as the asset increases its value over time.
✔️Choose your risk level.
Lastly, always trade based on your risk appetite. If you can’t afford to lose a lot of money, avoid aggressive investments. While big gainers are on the high-risk department, it also hides big losers.
Frequently Asked Questions
Q: How many people lose money in Indian stocks?
A: Around 95% of traders are said to lose money in the Indian stock market each day. Intraday trading is identified as the culprit behind most of these losses. According to Angel Broking, around 70% of intraday traders don’t last past their first year. Meanwhile, 95% of intraday traders will stop in their third year.
Q: Will you lose all your money if the stock market crashes?
A: You’ll only lose your money during a market crash if you don’t have a diversified portfolio. Also, if you sell your positions right after a crash, you’ll likely lose money. On some occasions, it’s best to wait until the market corrects itself so that you can recuperate during an upswing.
Q: What is the best stock advisor in India?
A: Some of the best stock advisors in India include AGM Investment, Research and Ranking, Capital Via, and Mister Market. They can greatly help in preventing you from losing money on stock investments. Just make sure that you pick one that caters to your needs.
Q: Should I sell my stocks if the market crashes?
A: Most market crashes will not lead to a permanently low price. The market will soon rise, and your stocks will recover. However, the period to which this happens varies widely. For some, it will take days while others weeks or even months. Those who can hold on to their investments the longest often reap the most benefits.
Q: Who is the richest stock broker in India?
A: Radhakishan Damani is known to be the richest stock broker in India. He’s also dubbed as ‘Mr. White Man’ because of his all-white attire. He mentors billionaire investor Rakesh Jhunjhunwala, which is yet another proof of this success in the stock market.
Why do I keep losing money in the stock market? The stock market always experiences ups and downs. Through these movements, traders are bound to lose or gain money. It depends on how you play your cards in the game. If you don’t want to lose a lot of money, you should tone down your trading aggression and reduce your leverage. That way, you can mitigate the impact on your capital.