It feels exciting to invest in the stock market. You hear stories of lots of people making thousands of dollars by investing in just a few years. It’s obvious after seeing such inspiring stories, that many people want to start investing. But the truth is different – mostly first-time investors lose money. It is not like they are unlucky but is the because they make some common mistakes. But the good thing is that these mistakes can easily be avoided with the right knowledge and mindset.
In this article, we will explore why first-time investors lose money in the stock market and how you can avoid such mistakes if you planning to try it.
Lack of Basic Knowledge
It is very important to understand the basics of the stock market before investing, but most first-time investors don’t do it; they don’t learn the thing they just invest without any knowledge. Many people just start investing because their friend earns good profits or they got tips from youtube. But they don’t understand what a company does, what drives a stock price up and down and how the stock market works.
Without learning, they just invest in some random stocks. mostly at the wrong time. When the market goes down in panic, they sell at a loss.
What do you think? Can it be avoided by learning the basics of investing before jumping in? Yes, it can be.
Trying to Get Rich Quickly
Honestly, most people want quick money. And especially, the new investors think that the stock market is like a lottery; it is a shortcut to wealth building. They dream of investing $500 and getting $1500 in just a few days. Basically, they dearm they will invest and get double or more in just a few days. But it is the sad reality for them, the market doesn’t work this way.
Smart and experienced investors know what it takes to grow wealth in the stock market. They make a goal to build wealth over time, they not chase short-term profits.
Following the Crowd
Many new investors follow the crows, they invest because “everyone else is doing it.” They use social media to check the trend, and they follow what their friends are doing, but they don’t know their friends may also be doing the same. If they find any particular stock is popular, they just invest in it without any proper research. They don’t check if it is actually a good investment or not.
Overtrading: Buying and Selling Too Often
Some new investors get addicted to buying and selling often. They keep buying and selling every few days, and they think they are doing something really smart. But what actually happens is that they have to pay too much brokerage fee and taxes.
And the main thing is that they don’t allow their investment to grow over time as they are not giving time to it.
The stock market takes time, it takes months or even years to return.
It is always better to buy stocks of strong companies and hold them for the long term instead of overtrading.
No Investment Plan
You will be surprised to know that most of the new investors don’t have any clear reason; they don’t know why they are investing. They have an attitude like let’s put some money in the market and let’s try our luck.
Investing without a goal and plan is like going on a trip without a destination. Without a goal, there is no way to measure success.
If yo u don’t want to make such mistakes, then ask yourself why you are investing:
- For the retirement?
- For buying a house?
- For your children’s education?
Once you have a goal your decision will be surely clear and smarter.
Letting Emotions Take Over
Do you know what is the biggest enemy in the stock market? Well, it is not the bad companies but it is bad emotion. In investing and trading, emotions like fear and greed control the decisions of many new investors.
When the market is rising, some people get greedy and buy more and more in the hope that they are going to generate lots of profits. But in the market, there are many risky factors, and it is possible there could be a temporary rise.
In investing, emotion leads to bad choices, so you always need to think clearly.
We have a very informative article on “Emotional Intelligence in the Stock Market” You must go through it to learn how emotions affect success in the stock market.
Lack of Diversification
Most new investors put all their money into one or two stocks. If those stocks do well, then it is fine, but if they crash, they lose everything. This is why diversification becomes important. Diversifying means not putting all the money in one or two stocks but spreading it across many different companies, sectors or even different types of investments like ETFs and mutual funds.
Diversification helps in reducing risks, even if some stocks perform badly, others can balance it out.
Ignoring the Risk
In investment and trading, there is always a risk of loss. But new investors mostly ignore these risks and focus only on possible profits. They read somewhere, or hear from somewhere, “That stock can double your money”, and they invest without any research.
Not Learning from Mistakes
Almost everyone makes mistakes when they start investing, and that is okay. But repeating the same mistakes again and again is not okay at all.
Mostly, investors who lose blame the market, blame others or blame their bad luck. But they don’t review what went wrong for them and how they can avoid it from the next time.
It is always a good habit to keep a journal and write down why they bought the stock, what went wrong, what the main mistake was, and what they learned from it.
Conclusion
Most first-time investors lose money, and it is common but not necessary. If you understand the market, learn the things then you can avoid possible losses in the beginning. So, if you are planning to start investing in it, then you should learn the basics. You should have a plan. Apart from it, controlling your emotions and thinking for the long term will help you to take better decisions.
Thanks for reading this article. Please let us know if you are planning to invest in the stock market for the first time using our comment box.