Stock Market is a skilled game. Those who are able to control their emotions-Greed and Fear would surely gain wealth through stock markets/mutual funds. But when we closely observe the investors around us they would either burnt their fingers or lost their capital in the short-term! This is due to lack of emotional control and patience to hold the stock for long term. Do you ever think why this was continuously happening in the stock market?
There are mainly 4 Reasons for this, if we keep that 4 emotions in control you would definitely succeed in the stock market.
- Investing on the tips of friends and relatives– Generally in investing every investor has unique style- Whether he may be conservative investor, moderate investor or an aggressive investor, everyone’s investment mentality differs.
For some investors they can manage risk and can hold risk(aggressive investors)while some are savvy and worried even on a small gap-down(conservative investors).while some can manage moderate risk(Moderate Investor)
Stock selected by an aggressive investor might not suite to conservative investor while stock selected by conservative investor would not suite moderate investor. Stock selection should be based on individual’s risk-profile, holding period and risk taking capability.
Investing on the tips of friends and relatives is o.k, but you have to analyse whether that investment product matches your risk profile or not. Spare some time to research on the stock(company)fundamentals and after concluding that stock has bright future ahead then only invest in that stock.
- Investing Lumpsum( Bulk Amount)– Generally investors will get greedy in the bull market and want to catch the market momentum. By seeing the rise in stock prices generally investors invests bulk amounts but in stock market no one can predict the exact top(peak)and exact bottom.
What if the market crashes once you invests bulk amount? You get panic and sell that stock immediately on fear of losing capital. Thus you are making your investments notional-loss by booking losses on watching market crash.
This is the main reason why many investors are loosing capital in the stock market. Due to lack of emotional control they are investing at “Peak” and booking losses in “market crash”
To avoid this investment behaviour you should invests in small, small tranches in market dips. Even you have lumpsum money you should not deploy bulk amount in one-go.
- Lack of Diversification– If an investor get attracted to any company, he continuously deploys money in that stock assuming he is “Averaging” his investments. But in reality real wealth can be created if one has diversify his investments across all sector/themes.
As no one would predict which sector will outperform in the long-run, by diversifying your investments you can able to manage risk in tough times.
As there is a saying- “Don’t put all your eggs in one basket”, never deploy bulk money in same sector, instead diversify across all sectors
- Not giving time to investments– As world is transforming faster, investors are wanting “Instant Returns” Faster. They prefer instant returns and if that was not done in the short-term they are redeeming their investments without a second thought.
This is the biggest blunder most of the investors are making. Even though stock market thrills in the short-term, real wealth will be created in the long-run. This is because stock market is nothing but functioning of the businesses as a whole. If the economy grows automatically businesses will grows and creates wealth to the shareholders. It will take time for the economy to grow and thus our investments.
Even though stock prices are volatile, if you are confident on the future prospects of the stock you are holding, don’t book instant profits as you are loosing out long-term wealth creation.
If you are not confident on your stock future prospects, then realise that you are not an investor, instead you are a trader. To succeed as a trader unique set of skills are required. But in reality 95% of the traders burn their fingers by looking for short-term gains. Then who do you want to be- a Trader(Gambler- Looking for instant gains)or an investor(Long-Term wealth creator)?choice is yours!