 Photo: Wayne Silver (CC)
If you are looking for ways to build wealth and invest wisely, you will need to know how investors are losing money in the stock market. We feel that it is important to understand the factors that cause investors to lose money in the stock market. |
This article is republished with permission from Dollars & Sense.
Over-estimation of one’s abilities
There is a fine line between confidence and overconfidence. You are overconfident when you overestimate your abilities as an investor. When you are overconfident, the decisions you make will be extremely biased. You may end up taking too much risk.
It is good to have confidence in your own ability as an investor; it allows you to make quick decisions without losing out wonderful opportunities in the market. However, you have to be cognizant of the times that are overconfident. Knowing when you will be overconfident may just save you from a bad transaction.
Emotion Guided Decisions
We know of many investors who invested their hard earned savings based solely on emotions (especially novice investors). However, we can’t stress enough how important it is for you to do your due diligence! Have figures and facts to back you up before you make an investment decision. Always reason objectively with yourself before making a transaction. Ask yourself whether you are convinced enough. Do not jump in based on what you feel, jump in instead with evidence. The keyword here is hard evidence.
| "You need hard facts and figures on the stock being pitched to you. If no evidence is provided, you should do your homework before making any transactions." |
Buying on a Stock Tip?
“Uncle Tan living in Block 331 just told me that Wilmar International Ltd is going to climb at least 40% for the next 6 months! Can trust him because he works there! Confirm must buy! “
Sounds familiar? You may find yourself in situations where friends will recommend you to buy certain stocks due to various reasons. He or she may not be right. Whatever the reason, you will need hard facts and figures on the stock being pitched to you. If no evidence is provided, you should do your homework before making any transactions.
Unrealistic Time Horizon
Time horizon refers to the period of time that an investor holds a security/portfolio before it is liquidated (i.e. cashed in).
Depending on your investment style and goals, your time horizon can vary significantly from other investors. It is important to have a realistic time horizon that is appropriate to your investment style and goals. When you have unrealistic time horizon, you will make many wrong investment decisions. For example, if you expect to have an unrealistic return of 15% within three months, you will be inclined to sell your stock even when it may be performing higher than the industry’s average.
Catching the Falling Knife
There is a BIG difference between buying an undervalued stock and catching a falling knife. And, there is no reason to a catch a falling knife.
When buying an undervalued stock, the assiduous investors will do their homework. They know that the stock is undervalued fundamentally based on the industry’s average. They are confident that the stock is trading less than its actual value and have the fundamental figures to support their decisions.
“Catching a falling knife” happens when investors make ill-informed decisions without research and evidence. In this case, the investors do not know the true value of the stock. They start to lose money when their trades continue to be bearish.
Do not misunderstand “buying low, selling high”. More often than not, prices of stocks are low for a reason.
