No sooner than I started investing in stocks that I got my fingers burnt. It was indeed very discouraging since it was the first time I attempted investing in the stock market. The price of the stock I invested in plummeted. However, it was a wake-up call for me to learn all the nitty-gritty about the stock market. So why people lose money in stock market?
An investment in the stock market is one sure way of climbing the ladder of wealth. But occasionally one might have his/her fingers burnt since the value of stocks fluctuates. If you have experienced the same loss in the stock market, the chances are that just like me, you didn’t take time to study the stock market before investing.
In the light of the above, I have decided to put together top reasons why most people suffer a huge loss in the stock market and then proffer solutions on how to recover from such pitfall. Without further ado, let’s get the ball rolling;
Lack of proper knowledge on investment and economic market cycles
Economic and business cycles decline and expand. The expansions in the economic and business cycles are occasioned by an increase in the employment index, growing economy, and other indices indicating growth in the economy. On the other hand, when there is hyperinflation, increase in the prices of goods and services, and a decline in GDP growth, the stock market will invariably nosedive.
Global events are also capable of affecting the investment market. For instance, the 9/11 attack in the United States made the stock exchange market capitalization to drop by over 1.7 percent. This value is one of the biggest losses in the history of stock exchange. Also, the New York Stock Exchange on the 15th of September, 2001 dropped by over 14 percent. In The same vein, the S&P 55 and the Dow Jones plummeted by over 11.6 percent respectively.
Therefore, if you sold your stocks immediately after the 9/11 attack, you would have lost a huge amount of money. But if you didn’t sell your stocks immediately after the attack there are fair chances to get back the price. This means you had nothing to lose because, one month after the 9/11 attack, the prices of stocks on Nasdaq, Dow Jones, and S&P 500 rebound
Ultimately, it is advisable to sit tight whenever there is a drop in the prices of stocks until when your investments rebound.
Allowing Emotions To Supersede Your Investment Decisions
One reason why people lose money in stock market is due to behavioral finance. Behavioral finance is the union of behavioral economics and behavioral psychology. This union is the major reason why investors make poor investment decisions.
During the lifetime of your investment, a proper understanding of behavioral finance will go a long way to guarantee the safety of your investment.
When investing, the worst mistake an individual can make in terms of behavioral finance is herd mentality. This mistake plays out especially when such an individual “follows the crowd.” Herd mentality is a situation whereby an investor without evaluating the market trend decides to invest in the capital market just because other investors are investing in droves.
In the 1990s, individual investors and venture capitalists alike were investing massively into internet companies, hence causing the value of these companies to skyrocket. However, the majority of these companies did not have financial stability. In a bid not to miss out, investors continued to display the herd mentality with their investments.
In order not to get your fingers burnt, it is advisable not to follow the crowd. Also, overvalued assets should be completely avoided. What you should do instead is to create and follow a sensible plan (investment wise).
The thought that the stock market is a scheme to get rich quick
When you hit the stock market with the thought that the market is a get rich quick kind of scheme, then the probability of losing your hard earned resources within few trading days are high.
A study recently conducted shows how experienced and potential investors are the cause of their problems. Between 1997 and 2016, an active investor in the stock market earned an average of 3.98% per annum. While the index on the S&P 500 was about 10.16% in returns during the period. The above result was informed due to the fact that the average investor wanted to play smart by making the frequent selling and buying of stocks a practice with a view to making huge gains.
Hope this blog helps you understand why people lose money in stock market. In order not to lose money, ensure that you keep things slow and steady. Although your fingers may get burnt once in a while, a slow and steady investment style remains the ultimate winner in the money race.
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