Why Beginners Lose money in Stock Market?

Global investment bank Morgan Stanley believes the Sensex can touch the 33,000 mark in a base case scenario by December 2017. However, in a bull-case scenario, it can hit the 39,000 level.

Domestic equity benchmarks BSE Sensex and NSE Nifty are hovering near their all time highs. But, have the retail investors made money in this recent bull-run? The answer is generally NO. The reasons for retail investors to lose money are mostly because they tend to do some basic fundamental mistakes while trading in the stock market repeatedly. In fact, investors have been making these same mistakes since the dawn of modern markets, and will likely be repeating them for years to come. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them.

1.  Chasing Performance :

Many investors select asset classes, strategies, managers, and funds based on recent strong performance. The feeling that “I’m missing out on great returns” has probably led to more bad investment decisions than any other single factor. If a particular asset class, strategy or fund has done extremely well for three or four years, we know one thing with certainty: We should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out, and the dumb money is pouring in. Stick with your investment plan and rebalance, which is the polar opposite of chasing performance.

2. Lack of Trading Plan :

Not having a trading plan or sticking to one is a common mistake most traders make. Experienced traders get into a trade with a well-defined plan. They know their exact entry and exit points, the amount of capital to be invested in the trade, and the maximum loss they are willing to take, etc. Beginner traders may be likely to have a trading plan in place before they commence trading, but are more likely to abandon it than seasoned traders if things are not going their way

3. Failure to Cut Losses :

One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. In addition to tying up trading capital for an inordinate period of time in a losing trade, such inaction may result in mounting losses and severe depletion of capital.

4. Booking Small Profits :

Beginners and most traders cut their profitable trades early and let their losing trades mount. Trading isn’t about being right. Its about losing small when you are wrong, and winning big when you are right. Successful traders Win Big and Lose Small.

5. Attaching Emotions to Trading :

Emotions drive most of our actions. One of the most common complaints from traders, either new or experienced, is that their emotions go through a roller coaster when they are involved in the markets. We’ve all experienced the downside of emotions –panicking and closing out a trade at the worst possible moment; being too greedy and taking on an excessive amount of risk. This is where your Trading Plan comes in handy. Just stick to your Trading Plan and leave emotions out of your trades.

6. Unrealistic expectations from Market :

Some people start trading in the stock market with unrealistic expectation on returns from Stock Market within a very short time. They expect to make huge profit from the day one and usually end up losing their money in the market. You should always be clear from the day one that making money in stock market requires same qualities as required in other aspects of life like hard work, intelligence, patience etc.

7. Lack of Homework :

New traders are often guilty of not doing their homework or not conducting adequate research before initiating a trade. Doing homework is critical because beginner traders do not have the knowledge of seasonal trends, timing of data releases, and trading patterns that experienced traders possess. For a new trader, the urgency to put on a trade often overwhelms the need for undertaking some research, but this may ultimately result in an expensive lesson.

8. Bottom Line :

Trading can be a profitable endeavor, as long as the trading mistakes mentioned above can be avoided. While traders of all stripes are guilty of these mistakes from time to time, beginner traders should be especially wary of making them, as their capacity and capability to bounce back from a severe trading setback is likely to be much more restricted than with experienced traders.