Current Market Scenario:
After witnessing some uncertainty because of US elections, Stock Markets all over the world are trading at their all-time highs. FTSE and some European markets have not yet touched their highest peaks. Nevertheless, it has been stellar growth in the equities segment in the last three weeks. S&P 500 has risen by 339 points or 10.3% from its close on 26/10/20; it closed at 3609 on 17/11/20. Coming to our national index, Nifty 50 has gained over 1235 points or 10.6% from its 26/10/20 close. Nifty closed at 12880 on 17/11/20. By any means, this kind of growth is not genuine or safe with Corona cases rising and lockdowns being imposed again.
There is a lot of dilemma and exchange of words between experts with bullish and bearish views. Everyone has their own view of the markets, but personally, I feel that it is not the right time for new investors to put their money in stock markets. Investors can choose other undervalued asset classes like precious metals such as gold and silver or other commodities. As far as traders are considered, there are always entry points available in these uncertain markets.
This Bull Run might still has some momentum left fueled by the possible stimulus coming soon from the US government and news of the Coronavirus vaccine. It might aim towards newer highs by the end of this year. Anything can happen; one crash on a particular day could trigger a panic sell-off powered by algorithms.
Overview:
Coming back to the main subject of our article, “Possible ways of losing money in Stock Markets, we shall discuss how newbie investors get trapped purchasing stocks they don’t know or understand. Investing in the stocks just because your friend, neighbor, or relative has put their money would land in the soup.
Below are the eight ways of how investors or traders lose their money.
- Following Fake gurus on social media
- Trading Penny Stocks
- Falling prey to Value Traps
- Purchasing high premium stocks
- Intraday trading with Margin money
- Trading Options and Futures without prior knowledge
- Investing in stocks that you don’t understand
- Taking short term positions against the market move
Investing in stocks that you don’t understand:
As I always say, there is a clear difference between Investing and Trading. Buying some shares of a company, holding for a couple of months, and selling for a certain profit or loss does not come under Investing. It is called Swing Trading, which involves buying shares or commodities, holding for some days or weeks, and selling.
People, especially, newbie investors often confuse Swing Trading with Investing. In Swing Trading, usually, a trader will not commit a substantial amount of money in a single trade or stock. Whereas, for an investor to profit from any investment, the capital invested should be decent. I usually invest at least 5% of my total capital in a single stock for investment. As legendary investor Benjamin Graham said, after through analysis, an investor shall purchase shares as groceries but not like perfume. What he meant to say was that if the investor has to benefit from an investment, then capital invested has to be substantial.
I come across many posts on social media that they are new to the stock market and could invest only ₹50000. First of all, a person who willing to put money in stock markets should know that there is a very good probability of losing money. There is a great chance of investors with small capital end up with their hard-earned money locked in penny stocks. According to studies, people feel satiated owning a higher number of shares. For example, with a capital of ₹50000, you can buy 1000 shares worth ₹50 each, whereas, you can own only 50 shares of ₹1000 each.
My Own Experience:
The satiation of owning more stocks makes newbie investors buy shares of companies that are trading at lower prices or sometimes penny stocks. A year ago, I wanted to experiment with penny stocks. I bought 3000 shares of HDIL for ₹3.5 each. Even though I only spent around ₹10500, I had 3000 shares. To be frank, there was a pleasant feeling to own so many shares. What happened afterward is a completely different story. HDIL management was involved in a money-laundering scam of PMC bank. The shares fell as if they were on a landslide. Within two months, each share was trading at ₹1.5.
Ultimately, those HDIL shares took a U-turn in the bull market since April 2020. I sold them at ₹6.2; fortunately, it was a 75% gain in one year. Even though the return was over 75%, it did not matter a lot because it was an experiment, and I invested a very little amount. It was also a fluke, and I do not consider it as any sort of investment win.
All I knew it was a penny stock with a very low Price to Book value, and it was trading for ₹1100 in 2008, and belonged to housing and real estate business. Since I had put only a minute fraction of my capital, I did not research or analyze the share in-depth. It was a classic example of buying a stock that I did not understand. However, it is not the case with newbie investors purchasing shares for the first time.
How newbies and mom & pop investors are trapped:
Most of the newbies find out that their friend or colleague had invested in a stock and made 50% returns in one month. Without any second thoughts, they collect whatever cash available, even borrow some money and buy those shares. To their amusement, the shares continue to increase for some more days after the purchase. Everyone is happy since their first shares are making them so much money.
This is when people get greedier. Now, they will get whatever cash possible, withdrawing from their savings, sell some of the assets like jewelry, and put all of that money in the stock. It is similar to the bubble phase. One day, the shares that have been continuously soaring for some months suddenly crash and hit the lower circuit. This process continues for many days. Only after operators have dumped their stash, this lower circuit phenomenon ends. By this time, the share would have reached its previous price trapping all the juvenile investors.
To make it easier for you, I have included a picture showing price action of such stocks where newbie investors are trapped.
Think and analyze before investing:
Before investing in stock markets, every investor should do their homework. Invest in any stock only after you have a basic understanding of its evaluation, business, and anticipated return. Almost all blue-chip stocks are trading at very high premiums in the current market. It is not the stock but the price of that stock decides the quality of investment.
For instance, Reliance was trading at ₹2350 a month ago. By then, it had already witnessed over 160% gain from the March lows. People began buying it aggressively even at that price. Now Reliance has fallen over ₹400 rupees and is currently trading at ₹1950 levels as of 17/11/20. To be specific, Reliance share fell by more than 17% from its highs. It does not mean that Reliance is a bad investment. People who bought at ₹2300 or higher should have reconsidered their objectives.
At these extreme high premiums, every blue chip is not a high-quality investment idea. Before investing your money, just spend some time thinking about whether the stock market is undervalued or overvalued. Do not invest just it is a blue-chip stock. Remember, during the Covid-19 crash in March, every stock in the Nifty got hammered. It is better to approach any investment advisor or analysts before making any investments.
As far as Reliance share is considered, it was a much safer and attractive investment at the price ₹1000 it hit during the March crash. No expert was voting to put money in stock markets then. It was the time when every institutional investment firm and high net worth investors were buying that panic sell-off. All the retail and newbie investors enter the markets at the wrong time and buy the shares at high premiums.
Conclusion:
Understanding a stock includes analysis of its earnings, fundamentals, risk, the business of the company, tenure of investment, etc. Purchasing the shares based on some experts or investment firm’s advice on the websites or forums do not make prudent investments. It is a simple assertion, there is no free lunch or no free advice. All these investment firms have the premium customers who pay for the services. When they advice some shares as investment opportunities for free, there has to be of some vested interest.
I get trolled when I say it is not a genuine bull market, but we shall wait and see another six months. Things might get clear by the second quarter of 2021-22.
POSSIBLE WAYS OF LOSING MONEY IN STOCK MARKETS – 6
Disclaimer:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online
