I know, what you would be thinking right now reading the title above. Have I gone insane that I’m talking about losing money? The person who always talks of making money, creating multiple sources of money, multiplying money generation, investing, and compounding the money invested is talking about losing?
You might also think you could have landed on a wrong blog handle. Trust me you’ve not!
You’re at your loved blog handle: DhandhoInvestor and we’re not going to talk of losing money purposely but yes, unknowingly. There are a lot of instances that happen in the share market while a person observes the ups and downs of stocks. Sometimes, these instances make a person lose money due to their short-sightedness and impulse action.
I’m going to list down a few major causes of such impulses which eventually cause one to lose money in Share Market:
You got Star Struck
It is a fan-girl or fan-boy moment for you and you don’t want to miss it at all; you fight every odds to have possession of it. Since you invest in a company just because a celebrity or an influential figure is joining their management team or has invested a significant sum into the same; you buy it and later you may regret it. Let’s not compromise on the basics of investing and fall trap of such crushes.
You bought High Debt Company
Sometimes the investor falls trap for such shares which are available at a low price than their usual. These companies could be carrying high debts on them and may declare themselves as bankrupt at a certain point.
It is advised to check for the debt to equity ratio carefully while making a share’s purchase. This parameter gives a clear glimpse of how the company is sailing with respect to their finances. It’s imperative to keep a track of their annual reports on a quarterly basis. So that the investor is fully aware of the management’s actions taken to decrease the debt. If it does not happen, it’s better to leave the shares with some profit booked.
Share is available at 90% Discount from the 52 Week’s high
Shares are unlike household items or grocery that can be stocked up when discounts are running to be used later on. Even if the shares are available at a 90% discount, investors need to do their maths. We never buy rotten mangoes although available at INR10/- right?
Averaging poor stock and booking profits in Good Stocks
In the fight for survival in the market of investment, one can learn a lot from the art of judo. The first and utmost important message in that martial art is somewhat similar for the stock market: damage control. But sometimes while controlling the damage the investors make some non-coherent moves.
Investors sometimes try to take out money for buying not-so-valued stocks in their portfolio. This way they lose on both the fronts.
Astonished by Dividend-Paying Companies with Huge Losses in Books
As per the governance, companies can pay dividends only out of profits or from their profit reserves. The rules for even the loss-making businesses to pay dividends was integrated into the Companies Act. So that companies that regularly pay dividends can continue to pay a dividend even in a cyclic recession when they may be making losses. Still, in case the company is paying dividend out of its profit reserves, there are strict norms that it has to stand by. Such as the rate of dividend should not go beyond the average rate of a dividend of the past five years or 10% (any of which is lesser). Moreover, the total amount taken from the profit reserves should not go beyond an amount equal to one-tenth of its paid-up funds.
Sometimes, we investors fall trap of such regularly and high dividend-paying companies. We begin investing in such shares without realizing though they’re providing dividends regularly but are they maintaining a good book for their profits? We should ask these question and satiate our answers by analysing their annual reports before making any investment.
Buying because Recommended on TV Shows
You’re enjoying breakfast while watching TV and your favourite news channel is showing up some recommendations for you to follow as the clock ticks 9:00 AM. Most people get tricked by such non-researched references. How can one be sure that the recommendation has been well researched for its future growth and assured returns? How can it not be someone’s advertisement to be followed and eventually bought in the market the very next day?
The whole point to this debate is that one must do their own research on all the important parameters before going for a stock investment. TV anchors could be having their biased references for some reason or the other. Be wise, take your call yourself.
Buying on Peak Exuberance…FOMO (Fear Of Missing Out)
FOMO stands for “Fear of Missing Out,” a human behaviour that can very well describe why the stock markets can hit the roof at one time and then dive the next moment. When the market hits an uptick the FOMO become hard to handle.
When it appears like each person around us is taking benefit of the most lately spread market styles and we are missing out. Evidently, changing one’s investment portfolio altogether would be a silly move to take. As we would be selling shares with prices that have remained either static and may now be undervalued as compared to the market. To buy those shares which have recently shown significant growth but are likely now expensive. These are the type of results that FOMO can cause and it would be wise if we can avoid this type of thought process completely.
I hope you like me summarizing some of the tiniest reason which sometimes makes us fall prey and lose money in the share market. I would like to know about your experiences of the same.
Get in touch for what all reasons do you think that make an investor lose money in the share market.
I would love to hear your thoughts!
