Four Ways to Avoid Losing Money in the Stock Market

Investments, be it in real estate, gold, stock market or any other avenue, must be done not on the basis of tips but after thorough research. It has often been observed that investors in the stock market buy and sell shares on the basis of “hot tips”, but end up losing their hard-earned money. They end up blaming the market and never return to it. Others invest on the basis of past performance of a stock and also end up losing money. So, the question arises: how can one avoid losing money in the market?

Here are four ways to do that.

1.     Control emotions

Controlling emotions can be a difficult ask, especially when one sees their portfolio value plunging on their screen while they stare at it helplessly. At that moment, the desire to cut losses and sell are overpowering, as they feel the downward trend will continue. But here's a reminder—declines don’t last forever. In such times, visiting past data of market correction is helpful.

During phases of extreme market corrections, investors who stayed put and didn’t sell their shares often recouped their losses within a few years. In the same manner, when investors/traders witness gains, they become restless with either of the two thoughts: what if the value goes down soon? "Let me liquidate", or, "this is enough for me, I’ll liquidate". In both scenarios, they could have booked higher profits, but because they let their emotions get in the way, they couldn’t maximise their profits. Patience and belief in research is the key to not letting emotions overpower buying and selling decisions.

2.     Set realistic expectations

As an investor, one must always set a realistic expectation from their stock investment, so that they can exit the market on time. If they set unrealistic expectations, there are higher chances of them booking a loss, as the share price won’t reach the target they have set. Understand that their returns will be an average of positives, negatives and flat returns, rather than linear. For example, if one is investing in a large-cap stock and its historic return is in the range of 8-10 per cent, expecting a return of 18 per cent would be a poor decision, unless there is enough research to support those expectations. Hence, realistic expectations are important to reap positive returns from the market.

3.     Invest in line with the risk appetite

Does market volatility bother you? If you see a drop in prices of your invested stock, does your stomach churn, or do you barely notice these things? It is really important for investors/traders to invest as per their risk appetite, so that market volatility doesn’t affect them much. This will enable them to make informed decisions. One can earn more in the long term, compared to the short term churning of their portfolio. Investing should help one meet their financial goals, instead of taking them further away. It is always advisable to invest only that sum of money which wouldn’t affect one's day-to-day financial needs. It is also advised that one should have an asset allocation model that suits their appetite, so that their financial goals are met over a period of time.

4.     Educate yourself

Knowledge of the domain that one operates in is crucial for easily navigating theirway through it. Be it investments, work, business, etc., being aware of what you are doing is very important. Stock market is no different. One must learn fundamental and technical analysis and learn to implement them in their investment strategies, so that they can make educated decisions, instead of investing into a certain stock because they have a “hot tip”. Such hot tips burn fingers faster and leave one with nothing. One needs to learn charts, study balance sheets and ratios of companies and then implement it in their own trading. Many traders do not want to work hard and hence go with tips, which eventually cause a dent in their wallet.

As an investor/trader, it is important to follow the above mentioned tips in order to reap gains from the market. Remember, educate yourself, control your emotions, invest as per your risk appetite, and set realistic expectations.

The writer is Chief Business Officer at Reliance Securities

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.