5 Reasons why people lose money in Stock Market

I have spoken to many traders and investors in last few years. Almost everyone has the same story that why their trading account got bust at some point in time. I documented this conversation and found the top five mistakes done by these traders that caused this loss of money.

1. Trading for Fun: Most of the people who start trading don’t take it seriously for the first 1 year. They just trade to experience that feeling to anxiety and excitement when the stock prices change every second. Initially, it doesn’t matter to them whether the they are making loss or profit, but soon they realize that their whole capital is eroded. It’s more like a gambling for them.

2. Trading on Gut feeling: This is yet another dangerous thing which makes people lose money. You might have heard people saying about a particular stock that it has bottomed out, and it will start moving upwards soon. People tend to assume such things irrespective of any rationale behind those. And when the same stock goes down by another 10-20%, these people say good-bye to markets. This is nothing but gut feeling which should be avoided in stock markets.

3. Over-trading on margins: Concept of margins was introduced to help retail traders with inadequate capital. But most of them haven’t used this rationally. People started over-trading as they could now trade for as much as 10 times of their capital. Small profits made them happy but a big loss wiped off their entire trading capital. Read our article on how to use Margin trading effectively here.

4. No Stop Loss: Stop Loss is the price where your positions are automatically squared off. It’s a measure to limit your losses. But generally beginners don’t put stop loss order, thinking that their position would break even or move to profit zone in a course of time. But eventually the losses grow and these people regret of not putting a stop loss order. Every novice trader has this trait that they limit their profits and let their losses to grow.

5. Naked Options trading: Basically options were introduced in markets as a hedging instrument, but people started trading on naked options. Internet is full of crap stories about people who quadrupled their money trading in options. Amateur traders believe in these one time wonders and start trying their luck on options. They don’t realize that options are one of the most complicated trading instruments and it requires years of practice to tame options.