Tips to STOP losing money in the stock marketAs the market saying goes, only one out of 10 investors can make money from the stock market. The rest always incur losses in the stock market.
Some retail investors believe they can make quick money from the stock market. They believe that investing in the stock market is one of the best ways to accumulate wealth in a short period of time.
However, due to lack of proper financial training, investing knowledge and intelligence, they always find themselves at the losing end. When they are excited about investing, the stock market may be nearing to the peak.
On the other hand, when they are suffering losses, losing patience about investing and intending to cut their losses in the stock market, the market may be touching the bottom, and that, in fact, is supposed to be the best time to invest.
A majority of retail investors seldom pay attention to the stock market. They will only start doing so when newspapers or TV news headlines show that the market is touching a new high.
Driven by greed and the thought of making fast money, they will follow their friends or tips from their brokers to invest without paying much attention to the fundamentals of the stocks.
Due to lack of discipline to cut losses, more often than not, they find themselves holding on to a lot of poor quality stocks when the market collapses to a very low level.
We believe that the majority of retail investors do buy a mixture of good and poor quality stocks. However, they tend to hold on to poor quality stocks and sell the good ones when the stock market collapses.
This is because when the stock market crashes, poor quality stocks will drop much faster than good fundamental stocks.
Most retail investors find it difficult to sell poor quality stocks as the stocks may drop far lower their buying prices within a short period of time.
As retail investors refuse to admit their mistakes, they will hold on to these stocks, hoping to break even again in the future.
Unfortunately, they overlook one important market saying, which is: What goes up may come down, what goes down may never go up.
We may have emotional feelings about stocks but we should not refer to our purchase prices to determine whether we can cut our losses.
Our purchase prices are only important to us; they mean nothing to the overall market.
As our purchase prices may be much higher than those of other investors, even though we may not be able to sell the stocks, other investors, especially the company owners, can still liquidate their stocks.
We need to be careful when trading in speculative stocks especially those with prices that are much higher than the book values of the companies. The book value of a company reflects the owners’ costs in the company.
Hence, even though the stock prices tumble to a very low level, as long as the prices are still higher than the book values, a lot of company owners can still liquidate the stocks as their market prices are still higher than the cost invested.
Article taken from the STAR newspaper dated 29th July
