5 Ways To Avoid Losing Money In the Stock Market

By Angel Broking | Published on 14th June 2021 | 1591

5 Ways To Avoid Losing Money In the Stock Market

Everybody wants to win in the stock market, yet 95 percent of traders lose money. Why?

Investing in the stock market isn’t an easy task. If you invest carefully, you can grow your wealth by leaps and bounds. But similarly, there are also a thousand ways to lose your hard-earned money in trading. As investors, our objective is to avoid the pitfalls and invest judiciously.

Here are the five common mistakes (most traders make) to avoid to become successful in the stock market.

Short-term or Long-term: Which Is Right?

When talking about share market investment, most investors still think of it as a place for short-term gain. It is rather opposite. A long-term approach is an excellent way to grow wealth from investing in stocks, but short-term goals can lead to substantial loss.

Investing in the market for long-term allows investors to tide over market volatility and generate a substantial gain. Share market investment requires careful planning, knowledge, and an ability to stay focused on your goal. So, investors shouldn’t expect overnight profit.

All three of the 3Ms of trading – mindset, method, and money management are equally important for share trading success. Without mastering these three Ms, one can’t last long. One needs a rational mindset to take unbiased decisions, an approach or method, and efficient money management to know when and where to put it.

Gain Some Knowledge Of The Market

Trying to trade in the market without knowing it is like jumping in the sea without learning to swim.

Before investing, gain some understanding regarding the market and economy. Most investors jump into the market without understanding it, which leads to wrong investment decisions.

Economy and the market are closely related, and one will affect the other. Understanding economic cycles will help you understand when stocks prices will fall (or rise). You can use a short-term fall in the market to plan your entry. Similarly, when the market is falling, and if you have already invested, it is essential to know when the drawdown phase is temporary and wait for the market to rise again.

Knowledge of economy and market will help you stay focused and avoid mistakes caused by panic.

Avoid Frequent Buying And Selling

Most investors lose money in the stock market because they lack patience. Instead of looking at long term gain, they follow day trading strategies. During 1996 and 2016, an average investor earned 3.98 percent annually when the S&P 500 index return was 10.16 percent. The reason is simple. Investors often practice frequent buying and selling for short-term gain. The rule of thumb for long-term gain in the market is to follow a proven investing method and select stocks based on strong fundamental analysis.

Stock Picking Based On Strong Fundamentals

We tend to base our investment decision on the past performance of a stock. However, it is not the best approach since company fundamentals can change during the period. Hence, it is risky to buy company stocks based only on historical data. Investors must incorporate fundamental analysis in their investment strategy.

One must compare stock price, P/E ratio, and fundamentals of a company with peers while investing.

P/E ratio (price-to-earning) is a critical determinant which tells you if a stock is overvalued or undervalued. Comparing P/E ratio will give you a fair idea of how expensive or cheap the stock is and the company’s ability to earn a profit.

Don’t Let Emotion Guide Your Investment Decisions

As investors, we aren’t free from emotional biases. Sometimes investors get attached to a stock and ignore changing fundamentals. They remain biased to the decision and don’t exit at the right time.

Also, several adverse events can impact the market. It is important to analyse how different events can impact the performance of company stocks while you invest.

Don’t Hurry To Book Profit

Sometimes investors get swayed by the smallest market news and rush to book for profit. But when you plan to invest long term, selling a good stock to book a small profit is the worst investment mistake. Investors must avoid costly mistakes if they want to build wealth through stock market investment.

Sometimes investors follow other investors and invest in stocks which others are investing without considering the fundamentals. This is called herd mentality, which refers to following a group without evaluating available information regarding the underlying stock. One must carefully avoid jumping the bandwagon if they want to last long in the stock market.

How To Deal With Loss In The Market

Despite one’s best efforts, losses happen, and it is always difficult to deal with losses. But when it happens, investors must acknowledge and deal with it.

Here are some tips to help you to deal with stock market losses.

Accept The Loss: when you make a loss, always own it. Don’t try to suppress it or brush it aside.  The earlier you accept the loss, you can take control of your trade.

Take A Break: taking a break is necessary to figure out what’s wrong with your investment strategy. Review your strategy and the stocks you have picked. Did you take too much risk? Or did you time the market wrong? Some traders have the habit of writing down both profit and loss deals to compare the note later to adjust their strategy.

Make A Better Plan: Evaluate your strategy and determine the factors that could reverse the trade position. Experienced traders will reverse their position when the conditions permit and even profit to cover their losses.

Get Inspired: Losses are hard to digest but put your losses in perspective. Use the loss as an opportunity to learn a new thing and develop new skills. Think like an athlete. They get inspired when they find a weakness in the game and make a stronger comeback.

Finally, get back in the game. One mistake or loss does not define your worth. So, don’t let it dishearten you. Come back with a better strategy.

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