Why Investors Lose in the Stock Market

Why investors lose in the stock market
By Bosede Olusola-Obasa

I have found that if you control losses when trading, the profits will tend to look after themselves. If I could only tell beginners what the destructive behaviours are before they start, they might be spared much financial pain,” says a renowned financial analysts, Colin Nicholson, in one edition of his articles published on the web.

Nicholson, who has written nearly 200 articles and columns about technical analysis, trading and investing since the 1990s, identifies some ways people set about losing money in the stock market. He faults the following ideas and urges caution in adopting them:
- Learn to pick the tops and bottoms.

Trading with the trend is for wimps. No wonder they don’t become rich, they leave too much on the table. You can capture it all, buy the low of the trend and sell the high. Yes, buying a new low is trading against the trend, but you do know when the trend is going to change.

- Take profits quickly and hold on to the losers
It is no wonder traders lose. They keep leaving their winnings on the table where the market can grab them back. They are just greedy. Better to take them straight away. But not the losers, after all, they say, a loss is not real until you sell. Besides, the experts tell you stocks always go higher after a fall.

- Do not waste time developing a plan of action
After all, everyone knows that he who hesitates is lost. If only you had bought a particular stock when it listed you would be very rich now. The problem with most people is that they know too much about the market and so confuse themselves. Since you know that most businesses fail for lack of a sound business plan, then it is not safe to go on without a sound-trading plan.

- Look to trading to provide the action you crave.

To succeed, you only need to get free of all those irksome restrictions. The market is a way to get free of all the things that have always held you back.

Even though many stock market professionals agree that an investor might not get it right all of the time, but with adequate attention paid to relevant market factors, a greater fortune awaits investors.

For instance, in his book: Timing the Stock Market, renowned author, Colin Alexander, provides a guide on how to identify when to buy, sell and sell short. To him, risk-conscious future traders would not think of trading without using timing techniques, adding that some professionals at times reject or ignore timing mainly because they do not understand timing or because they do not know how to use it.

He cautions against impulse investment while encouraging information-based investment decision-making, adding that fundamental and technical factors must be considered about a stock before funds are staked in it.

Before taking a step to purchase a stock therefore, he says the investor should attempt to find out about what he wants to buy, when to buy or sell it, the difference between it and the nearest alternative. He advises investors to take personal responsibility for his investments.

The Chief Operating Officer, CentrePoint Investments Limited, Mr. Jire Oyewale, asserts that many people have created wealth from the stock market because they were business minded in their approach to their investments.

He stresses that one of the pitfalls to avoid in stock investment is playing the absent investor who does not care about price movements, time and their implications. That way, he says, people easily lose money. He adds that a carefree attitude should be avoided rather there should be a desire to become more intelligent about the workings of the market.

He recommends that:
-You should avoid bandwagon effect, which is the syndrome of following the crowd in investment because it could lead to loss of money. This is because the buyer only bought because others were buying, refusing to understand its historic background, and possibly the expected performance because you are buying into the future of the company.

-You have to carefully consider your entry level (the price at which you are buying). You should avoid the mistake of thinking that a stock will continue to rise simply because it is currently rising because it is not always like that.

-You also need to consider when to exit (sell). The safe way to go is to learn to exit a stock when you discover that you have made a reasonable profit margin on a particular stock. You can exit it and reinvest in other good stocks that are trading at a lower price.

It is better to exit and make considerable profit than to eventually lose everything.

-It is better to trade in a stock with high price but with sound fundamentals and strong prospects than one trading at a lower price but lacking the prospect to turn your investment around.