Talk with almost anyone who has been invested in the stock market, and you will hear stories about losing money. There are several reasons why investors are faced with the possibility of losses in the market. Examining the root causes of these reasons is essential to overcoming them and becoming a more successful investor.
The emotions of fear and greed dominate the stock market. These emotions lead to instances where the price of a stock will depart, often significantly, from the true value of the company itself.
If fear becomes rampant in the stock market, many investors will sell their stocks. Many investors lose money simply because they get caught up in the irrational fear of the stock market. The let the market dictate what values should be worth instead of doing independent analysis on what they own.
So as an investor, what is the best way to avoid getting caught up in the fear and greed that drives short term speculation? Simply ignore the he financial news that constantly inundates the investment world on a daily basis!
Beware The News Hype
The various media outlets are in the business of gaining viewership, so they often make bad news seem even worse or good news seem even better than it is. This spin that they put on news items directly feeds into the fear and greed of the stock market, which then feeds into the irrational short term performance of the stock market.
By ignoring the daily news flow, an investor will not be as tempted to act on his or her emotions irrationally.
Beware Stock Tips
If somebody says that they have a stock tip that will guarantee wealth in a short period of time, do not believe it. Growing wealth takes time. Growing significant wealth takes a very long time. Since it is impossible to predict the short term performance of a stock, or even the stock market as a whole, an investor will benefit by taking a long term view of investing.
Buying stocks of high quality companies when they are being sold at a discount due to irrational fear or pessimism, and then holding these stocks for the long haul, while ignoring short term price fluctuations, is the key to growing wealth. There is no shortcut, and there never will be.
Avoid Frequent Trading
Another reason that many investors lose money in the stock market, or make less money than they should is due to frequent trading. Many investors believe that to achieve the best results, they need to always be looking for the next best investment to move their money into.
Something that is often overlooked is the high transaction costs associated with frequent trading. Investors incur a transaction cost each time they buy and sell a stock.
These costs vary based on the platform used to invest, but when you trade frequently, the costs quickly add up and can reduce your total returns by several percentage points. Over the long term, this can lead to significantly reduced returns compared to what an investor would have made had they simply invested larger amounts less frequently.