You might have read some articles on making money in stock markets, but I want to tell you how to lose money in the stock market. I have good experience in losing money in stocks 🙂
As a thumb rule, if you can cut off your losses in stocks, you will end up making money.
Don’t become greedy for making quick money through stocks but be patient and learn company analysis. I hope you will learn from my mistakes.
Avoid below points to Make Money in Stocks
#1. Blindly follow broker tips
I started investing in stocks in 2006, just after my first job. I was eager to invest in stocks but had no clue about the market. I started following the advice of brokers & analysts and made losses in almost all shares in early days.
Tip: Ask your broker to provide you a detailed analysis of the stock. Do further research on the stock before buying.
#2. Joining scam program
If you want to lose all of your money then find good scam program and follow their advice. They will make you bankrupt in no time. I started learning stock analysis by myself and kept myself away from such scams.
Scam programs collect thousands of emails of investors and recommend them stocks. They use divide and conquer method to predict stocks with 100% accuracy but actually they fool people. Manish, founder of JagoInvestor has written a beautiful article on how stock scam programs work.
Tip: Don’t spend even single rupee in joining any stock recommendation program
#3. Keep on averaging price
This is the biggest reason why your portfolio is still in Red. Everyone (including me) makes this mistake in early days of investing. When our stock starts trading below our buy price, we hold it tightly. One of the reason is our ego; we don’t want to look like losers. We don’t sell the stock even when it lose its 20% value. In fact, we start buying more as the stock keeps dipping further. One day, our stock purchased at 400 rupees is trading at 20 rupees with no hope of moving up ( Referring my worst investments in EduComp & KS Oil).
By averaging price to protect my ego, I lost 180 rupees per share of 200 average buy price of 100 shares – total loss of 18,000. I could have sold my 10 shares bought at 400 rupees at any price – worst case loss could be limited to 4000 rupees.
Tip: Don’t get married to a stock.
Related Read: 21 Lessons on Financial Management
#4. Sell your stock when in profit
.. but keep holding when it’s in loss
I don’t know why, but we sell stocks when we see them at small profits (10-15%). We do not have the patience to wait till profits become 100% or 500%. We regret after few months when we see our sold stock trading at the double price.
Smart Investors like Warren Buffett and Rakesh Jhunjunwala says to “Water the flowers, cut the weeds.” We do just the opposite. Cut the profit making stocks and hold on loss-making stocks.
Tip: Buy and Sell decision should come from fundamentals of the stock, not the market price.
#5. Buy penny stocks for getting rich
No one ever become rich by buying a penny stock. Check the portfolio of Warren Buffet or Rakesh Jhunjunwala – they buy quality, stocks not penny stocks.
We are fooled by so-called market experts who want us to eat shit, and we do. Someone recommended me to buy Cals Refinery stocks eight years ago, that stock never moved from 10-15 paisa.
Tip: Clean your portfolio from penny stocks
#6. Stock will not go further down
We get emotionally attached to stocks. Even today, I do. But I am learning how to break this pattern.
We buy shares of a company and it starts rolling down. Every day we think that our stock will not go further down, but it does. We don’t bother to re-check fundamentals of the company and think that stock is already at 52-week low price and it will get stability here. But you know what happens 🙂
Tip: Don’t rely on historical prices.
#7. Playing with future & options
..without understanding the fundamentals of trading
Last year I did the mistake of investing in futures and derivatives. I should have learned intra-day trading before investing into F&O but one of my friend taught me basics and I bought some options with stop-loss of 3000 rupees. I made a profit of 10,000 rupees in few trades.
Overwhelmed with my success, I played with bigger amounts and lost more than 1,00,000 rupees in few days. Now I am scared of F&O and invest only in long-term value stocks.
Tip: Learn F&O before investing any money.
#8. Over diversifying portfolio
In early days of my investments, I used to have all hot stock in my portfolio. I kept on switching stocks in the hope of making money from my diverse portfolio.
I was rather more confuse and clueless about my investments.
Tip: Buy a business that you can understand. 5 quality stocks in your portfolio perform better than 30 mediocre stocks.
If you know how to lose money in stocks then you have better chances of making money in the future. In recent years, I booked losses in all my non-performing stocks. With little knowledge and research, I holded 5-6 stocks in my portfolio and first time made profits. I am gladly filing ITR this year with capital gains as my primary income (however I made losses in F&O that can not be adjusted with profits in capital gains).
Wish you best, invite you to write few words in comments. Your thoughts will be valuable for all investors (including me).