Equity remains the most sought after class of investment. It attracts veterans and novices alike. The best part about equity investment is that it can be started with a very small amount. The returns are also quite high compared to other investment instruments.
For these reasons, a gush of new retail investors enters the market every year. Most of these investors enter the market under the illusion of making easy and quick money. This perception breaks early and most of them end up losing their hard-earned money. Saddled with the losses, many of them leave the market vowing to never return.
So, why do a staggering number of retail investors end up losing their money in the stock market? Let's examine a few factors here:
Limited knowledge and research:
Retail investors generally buy a stock without developing an understanding of its business. They often lack the information or their investments are not based on thorough research.
Like institutional owners, small investors do not have access to corporate boardroom discussions. Hence, they often fail to analyze the information and make an informed call.
Not understanding market cycles:
People often lose money in the market because they fail to understand the cycles. The economic and business cycles work in phases. Stock markets tend to decline in downcycling.
If an investor panics and sells their stocks in a downcycle, they tend to lose money. Staying invested in fundamentally strong companies is important during a bad phase. They could end up earning strong returns in the future.
Letting emotions guide decision-making:
In the market, like in life, people often make emotion-based decisions. Instead of data and logic; fear, greed, and bias often drive investment decisions.
Under the influence of emotional turbulence, investors often fail to handle market volatility. The extreme price swings often make them uneasy. Emotion-based decisions are often ill-timed and without logic. Under their influence, people take wrong decisions at the wrong time. which often leads to disappointing results.
Lack of patience while investing:
Patience is one of the greatest virtues required for long term investing. But, a new investor seldom possesses it. It takes time, discipline, and patience to grow your investments.
Many investors invest in good stocks but panic during the volatile Phase. They sell at the first sign of correction and lose out on long term compounding opportunities.
Looking to get rich quickly:
Some people enter the stock market thinking that it is a quick money-making machine. They forget that they can lose money as quickly. And often, that is the case.
Instead of making an informed move, investors often practice Intraday or short-term trading. Most of the time, it doesn't work. Investors must cultivate a slow and steady approach and stick out for the long term. It might cause pain in the short-term but ultimately, it will win the financial race.
Investing based on the basis of rumors and stock tips
In absence of knowledge, many investors end up investing, based on the stock tips. These tips could come from friends/relatives/colleagues. Tips are also bombarded via social media, WhatsApp groups and business news channels.
Following their advice without understanding creates a dangerous trap for innocent investors. They often mistake these tips as genuine and act upon them without putting much thought to it.
Succeeding in the stock market requires a host of combinations. It requires a dedicated and disciplined approach over a longer period of time.
A retail investor must cultivate enough knowledge to back their investment decisions. Also, It is important to stay calm. Riding through the volatility goes a long way in your successful investment journey.