by what about the failure stories every year millions of Retail Investors Lose Money in the Stock Market in India but nobody likes to talk about it. In the world of the stock market, everyone liked to talk about multi-baggers and people who created wealth like Rakesh jhunjhunwala.
There’s a very good saying we can learn more from our failures than the success. In this article, I have curated a list of 7 common mistakes people make in the stock market, resulting in people losing money.
This article is a result of extensive research that I have been doing over the past few years read it till the end and I am sure you will appreciate the content.
7 Common Mistakes that Retail Investors Lose Money in the Stock Market?
1. Investment in penny stock
let’s get started the first mistake is an investment in penny stock many people have an obsession with penny stock they think that when they invest in a penny stock the downward risk is very low for example if they invest in stock worth rupees 5 then they think that at most they would lose 5 rupees per share but the upward potential is huge.
One out of 100 penny stock has upward potential rest all have downward risk and how much you can lose? you can lose all your money. In fact, I asked 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 of rupees 10.
let’s call it to share A and there’s another share B worth rupees thousand now people think that if the industry is 10 000 they will get 1000 units of share A and only 10 units of share B.
let’s invest in share a folk this is not the right way to invest in fact share price has got nothing to do with valuation share worth rupees 10 could still be overvalued then a share worth rupees 10 000. for example, MRF is a classic case it is currently trading at rupees 86000 but it is still reasonably valued. yes, it is not overvalued even at Rs 86000 per share by the way do you know which is the costliest share in the world some of you would have guessed it it is Berkshire Hathaway.
The company of Mr. Warren Buffet does you know the price of one share of Berkshire Hathaway it is 3.67 lakh USD in other words it is 2.7 crore rupees. Yes, one share is worth 2.7 crores so share price has nothing to do with valuation majority of people lose money because they end up investing in penny stock.
2. No idea of valuation
What is valuation?
If I ask 100 people the majority of them have no clue about valuation they just invest because they think that the share is good or someone suggested the share.
Valuation is the most important criterion 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 a high return in the future.
The 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 herd
This is the biggest problem in our country majority of people end up investing in companies where their colleagues have invested friends have invested or relatives have invested. it is like :dubenge to sath mai”.
On a serious note, I have seen many people simply investing in tips from friends family members, or colleagues without even knowing anything about the company they have this blind faith again a major reason for losing money.
4. People look for 52-week low
Many people tend to invest when the stock touches a 52-week low doesn’t work like that you can’t simply avoid a stock just because it is at 52 weeks high or can’t simply invest just because a stock is at 52 weeks low.
On the other side, some people just invest looking at high returns in the past they invest when the company has already given bumper returns.
Both the approaches are wrong a stock at a 52-week low could even fall further if the stock is fundamentally weak but if a stock has fallen to a 52-week low due to external reasons like covid and the stock is fundamentally strong then it makes sense to invest.
The majority of people end up investing in poor quality stock at a 52-week low and stock at a 52-week high can either fall or rise based on the fundamentals of the company and future growth/
5. People avoid qualitystock
I don’t understand why but people have to identify hidden gems yeah Hdfc and keep searching for the hidden gems there is another problem people not only avoid high-quality stock but end up investing in poor quality stock and when the share price fall they invest even more to average out the price, friends this is a recipe of disaster.
6. Investing in day trading and fno
The next mistake is they end up investing in day trading and fno many people want to make quick money in the stock market as a result people end up doing day trading and even invest in the future as an option,
I’ve already mentioned that day trading is not everyone’s cup of tea you need to be a professional trader many people lose money in the stock market as they end up investing money on day trading and especially in fno by buying huge lots on leverage and even on borrowing money from others.
When they lose money they invest more with a hope to recover their lost money and end up losing even more.
7. Never learn from history
The final mistake is people never learn from history. for example, if today’s Sensex is at 50000 people think that it will only go up but if you look at the history you would know that if the market rise it also falls, and when it falls it eventually rise.
People today are going behind technology stock, they are willing to buy technology companies at any valuation I am not saying that they are bad but if you look at the year 2000, Dotcom bubble there was a time when every internet company was attracting super expensive valuation 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 business model and of course the evaluation likewise today everyone wants to apply for IPO.
Every IPO, not every company that goes for IPO is good, I keep saying that investing is not a science there is no fixed formula.
It is more of art if the investment was all about finance and numbers every finance and the economic professor would be a millionaire.
Conclusion
Retail Investors Lose Money in the Stock Market because Retail Investors try to invest in penny stocks rather than investing in good fundamental stocks, Retail Investors wants to earn money from flash due to which most of them lose money in the market. One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses.
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