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Why do people lose money in the stock market?

Updated: Dec 12, 2022

*This article does not constitute as investment advice. Please invest at your own risk. Investments can go down as well as up. For further information, please consult a investment or financial advisor*

Let’s be real, entering the world of investing without preparation can be daunting. As a newbie investor, there are common mistakes that may hurt in the long run, including panic selling, hoarding money, and trading quickly during unstable markets. But fear not, that shouldn’t put you off investing. When you understand the most common mistakes, you can adopt good behaviours to help avoid these mistakes.

Here are the five reasons why people lose money in the stock market:

  • Inadequate knowledge and research

It’s easy to believe rumours from unreliable sources if you don’t do any research beforehand. Investing without fully comprehending the risks involved is dangerous territory. Knowing the true potential of the business or market you intend to invest in, and the major trends that impact it are all necessary for a healthy investing mindset.

  • Trying to make a quick fortune

When you invest, you are not at the casino or playing the lottery. The wrong mindset is realising you can’t make money immediately, then quitting. Setting up high expectations, leads you to frustration. Knowing that you won’t become a millionaire overnight is key. Patience and a long-term vision is a must if you wanna dip your toes in investing. Focus on your long-term investment growth and disregard the "get super rich quick" offers.

  • Not diversifying or over-diversification

One of the biggest errors that most people make is putting all of their eggs in one basket. Investors frequently place all of their money in one or a small number of stocks because they are so confident in that investment. This is not a good practice if you want to build wealth.

Why diversify, you may ask?

It can protect you when there are stock market declines, difficult economic conditions, and bear markets. Think about distributing your funds so that if one investment underperforms, it will likely be offset by one that performs well at the same time. According to Modern Portfolio Theory, when a portfolio contains more than 20 securities, the benefits of portfolio diversification are reduced.

  • Taking risks they can’t afford

Consider your investment amount carefully to prevent overextending yourself with unaffordable investments. It all depends on how much risk you're willing to take in relation to the potential payoff, which will vary from person to person. Identifying your risk tolerance and understanding risk management will be advantageous to your investing experience.

  • Making investment decisions based on feelings

As humans, it’s natural to be swayed by emotions. However, there’s a lot of emotions involved in investing which can lead to creating costly mistakes. Being impatient and rushing is one of them. And there’s the lack of discipline, too. When the market is in a downward spiral, it is always best to maintain composure and review your portfolio than to act hastily.

While the aforementioned reasons are critical, speaking with a financial expert is always a fantastic choice. They can set together a strong portfolio and advise a well-thought-out investing strategy using their expert insights to help you get the most out of your investments.

This post is not meant to dishearten you. Investing is one of the proven ways to build wealth. Looking out for the signs related to these five reasons why people lose money in the stock market helps you overcome and correct your ways. Find a proper motivation and revise your money game plan. Trust the process.

Fempire Finance

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