How Do We Lose Money In Stock Market ?
We hear and read a lot that the stock market is a dangerous place. People lose their entire savings in the market. Staying away from the stock market is better etc. A lot of fear-mongering is done regarding the stock market.
But how exactly is the money lost in the stock market even if we plan to stay invested for a long duration?
Let us understand in detail.
There are 3 major ways (apart from trading) by which money is lost in the stock market.
1) Investing money in penny stocks: Penny stocks are the companies/stocks which do not have any real market value and are available at a very cheap price in the market. People buy these stocks in the HOPE that it might grow a lot in the future and it will give them good returns. Suppose you have 1000 rs and someone told you to buy ABC stock which is available at 10 rs per share. So, in 1000 rs, you can buy 100 shares. You will have 100 shares and you will hope that in the future if this company grows and its share price reaches 500 rs each, I will have 100 shares of 500 rs each, so I will get 50,000 rs. But in reality, 99% time, penny stocks do not grow. They end up destroying money. People still buy them because greed forces them to hope that these stocks will grow.
2) Investing in companies but not tracking them: The 2nd way in which people lose money in the stock market is by not tracking their investments. Suppose you have 1000 rs and you invested this money in ABC company. This is a good company with a good reputation and brand name. So you know that as it is a big company and not a penny stock, this company will keep growing. You become careless and leave your money invested in the company and do not track it. After a few years, you see that this company has made a huge loss and your money is also down. For example, Cox and Kings was one of the biggest tourism companies in the world. But today, the share price of cox and kings is 2 rs only. So if you had invested your money in this company and did not track its bad performance, you would have lost your money even though this company was not a penny company and had a lot of value in the market.
3) Bad timing: Suppose you researched a company and realized that this is a very good company with great fundamentals. So you invested 1 lakh rs in this company. This company is growing and your money is also growing. You track the company also and everything is going well. But imagine, suddenly, there is a war that starts in the world. Or a situation like covid occurs where the entire economy weakens. With a weak economy, even nice companies will suffer losses. So, the money that you invested in this company is also reduced. Your 1 lakh rs is reduced to 50,000 rs only as the company is in loss due to covid. But you don't worry as you know that situation will improve and the company will start making a profit and your money will also grow. Right now, your 1 lakh is reduced to 50,000 but slowly in a few months, your money will again start growing. But, suddenly, in your family, there is a medical emergency and you need money. Your bank savings are all used and now you only have this stock investment left. So, you will have to take out this 50,000 rs from the company by selling the stock as you need the money in the hospital. This is how you lost your money through bad timing. When the market is down and coincidently, at the same time, you need to take money out from the market, you suffer a loss.
4) The 4th way might look strange but is also a way of how money is lost. Imagine you invested 1 lakh rs in a stock. The price of that stock was 100 rs at that time. So you have 1000 stocks of that company. Your friend invested the same 1 lakh rs in the same stock but he invested 1 year before you when the price of the stock was 50 rs per share. So he has 2000 stocks of the same company. So, when your friend invested, at that time the price was 50 rs per share and when you invested, the price had gone to 100 rs per share. Now suppose after 1 year of you purchasing this stock, there is some problem in the economy and the stocks have fallen a lot. This stock has also fallen and the price is now at 75 rs per share. What will happen? A funny situation will arise. The same stock will be giving you a loss while giving a profit to your friend. Because when you purchased the stock, it was at 100 rs and now it has fallen to 75 rs, hence you are at a loss of 25 rs per share. But when your friend purchased the stock, it was 50 rs per share, and now it is at 75 rs per share, so still, your friend is at 25 rs profit per share. This is a strange situation that arises due to the timing of the market. But if you have selected the stock with quality and research, then you do not have to worry much about this. Just stay invested and the profit will come.
The solution to not lose money:
All these reasons for losing money can be avoided with basic planning and following such steps.
1) Do not buy penny stocks. If you do not know about a company or you do not have any idea about its business and fundamentals, do not invest your money in it with the greed that it will grow your money.
2) Only invest in companies after checking and understanding their fundamentals and past performance and future capabilities. And once you invest your money, keep tracking the performance of the company every 6 months. If you see the company is doing very badly, try to seek guidance from some registered advisor or take your money out with a minimum loss. Remember, saving money is more important than making a profit. If you save your money without making a profit, you can use that saved money to make a profit in the future but if you lose your money, you will end the capital that is required to make money.
3) Only invest that amount of money that you do not need to touch for any reason for the next 10 years. For all kinds of other needs, like medical emergencies or anything for which you might need extra money, keep emergency funds, medical insurance, and extra savings aside, so that you do not have to take money out of the stock market in case of need or emergency.
4) If you do not have the understanding or knowledge or time to research a company before investing, then stick with mutual funds as in mutual funds, the research etc is done by the fund manager. If you still want to be safer, stick to Index mutual funds.
In my opinion, a good strategy for someone who has no idea about the stocks market is:
1) 50% of investing money in index fund.
2) 25% in bluechip stocks.
3) 25% in mid cap and small cap mutual funds.
Remember, NOT LOSING MONEY IN STOCK MARKET IS MORE IMPORTANT THAN MAKING PROFIT.
Comments
Post a Comment