See stock market as a money making business. So before entering into business what does any decent Business Man do? Learn about the pitfalls of the road ahead. People lose money in Stock Market in many ways, some unknowingly and some knowingly.
Investing in Penny Stocks
Most of the Penny Stocks are Pump and Dump Schemes where a novice retail investor loses money by buying a stock in hopes of extraordinary return within a few days. Prices up to Rs. 50 can be regarded as penny stocks. Although, it may be a devious idea to tap into the stocks and withdraw your funds before the stock plunges, but you never know the entry and exit timings of the fraudster. It’s a big no no for long term investor. There is a possibility of presence of diamonds like Titan with good fundamental, do detailed analysis before a buy.
The concept of Day Trading has come from the West. Great Traders like George Soros have made millions in Day Trading. The success in Day Trading depends on the Markets you choose and the Stock you choose. You need to have Efficient Market to execute the same strategy successfully over the years. If you choose a market like US (which markets are near efficient), there is a possibility for success. But if you choose a heavily manipulated Market like India, it’s going to be tough in the long run. One should look for sustainability in any Business. And on top of that, Trading is a Zero Sum Game (since everyone have to close their positions by end of the day), so most of the Amateur Traders inherit the losses.
Playing with Futures and Options (Derivatives)
Futures and Options are financial instruments designed to hedge your position against Stocks. These are mostly used by Fund Managers and HNIs who manage large amount of money. But most retail investors use it a Get Rich Quick Tool. May be if you’re a Math Genius, and you’ve developed some strategy out of it to make consistent money over it then it’s useful. Else you’re as equal to playing a Roulette Table or Worst.
Humans are inherently emotional. Few months back, I tried Momentum Investing and after investing a handsome amount into a stock, the stock started falling, it kept falling for 30% more, I couldn’t take it anymore and I sold the position (The stop loss that I set for the stock is 50%) And few days later the stock started raising towards its usual price. So if you’re emotionally weak like me, some investing strategies are not for you.
Picking Wrong Stocks for Investing
New Investors, especially the millennials are so confident about the stock picks, while experts like Raamdeo Agrawal admit to their wrong picks half the time during their initial investment journey. Do Due Diligence before investing in a particular stock. If you don’t have enough time let the Fund Managers do their job. The Due Diligence includes learning about the Management (promotors) and assessing their past performance, Number Crunching from Company Financial Statements like RoCE, Topline Growth, Bottomline Growth, Free Cash Flow, PE Ratio, etc., and do some product research and competitive advantages over its competitors.
10 years back my dad used to trade stocks, based on watching TV (NDTV Profit) and implementing the daily tips, it’s not an irony if I say he never profited from that venture. It is to be noted that Television is an advertising medium and people on TV are paid to say things. I’m not sure yet why this doesn’t come under mass manipulation. And beware, your Broker do advice on the stocks, ask for a detailed analysis of their outcome too if you want to wager your wages.
Do let me know in the comments if you think of any more ways to lose money is Stock Market!