Why people Lose Money in Stock Market

Would like to share with my readers about two stories about how people lost money in stock market. First story is about How 32 year old Ankit Verma lost Rs 50 lakh in Futures and Options. Second story is about 73 old in Mumbai who lost everything that he earned. We first present you the stories and then let’s look at the lessons we can learn from their stories.

Lost 50 lakh in Futures and Options

From Economic Times First person account: How a small investor lost Rs 50 lakh in the markets

We received a dismaying e-mail from a reader ( Ankit Verma, 32 years, Mumbai) last week. He wanted to know how he could recover the Rs 50 lakh he had lost in F&O and leveraged commodity trading. This is his story.

1. STARTED BY INVESTING SMALL AMOUNTS I started investing in stocks around 2007, when the markets were doing very well. I put small amounts in stocks and earned good returns on almost all my investments. However, my income was not very high and since the invested amount was relatively small, the profits earned were not significant in absolute terms. Instead of investing small amounts, had I put a larger sum into stocks, my gains would have been quite substantial.

2. WANTED TOO MUCH, TOO SOON My initial success with stocks led me to believe that I can make good money if I leveraged my investments. The futures and options (F&O) segment was very alluring because I could buy 5-6 times more shares with the same amount of money. This was December 2007 and the stock markets were raging. I bought one futures lot of a gas company on the advice of my relationship manager. He encouraged me, saying that if the share price rose by 5%, I would gain 25% on my investment.

3. ALL GAINS WIPED OUT BY ONE LOSS The F&O segment is a brutal market. When the markets tumbled in early 2008 and my shares fell, the profits I had painstakingly made from small trades in the cash market during 2007 were wiped out by one loss in the futures market. I bought more to lower the average buying price, but it was like catching a falling knife. My losses kept on mounting even as the stocks drifted lower. I was forced to exit when I could not furnish the additional margin demanded by the broker. After losing in stocks, I tried to recover my losses by playing the gold futures market

DIGGING DEEPER Gold is supposed to be a safe haven… but not when you take a leveraged position. I repeated the mistake I had made in stocks and leveraged big time when the yellow metal was trading above Rs 32,000 per 10 gm. At one time, I was long on gold with a holding of 18 kg. And then the safe haven tag suddenly vanished leaving me with huge losses. My misery didn’t end though. Just before the election results, I went short on stocks and lost heavily when the Sensex zoomed. My salary is Rs 60,000 but will be repaying loans of Rs 18 lakh till 2017.

ET Wealth advice Stocks are considered risky because you can lose up to 10-20% of your investment in a day. But derivatives are far more risky because you can lose more than you have invested. These are sophisticated instruments meant for professional traders and hedge funds. Small investors should stay away from this segment can get back his lost wealth only if he vows never to buy futures and options. Stocks are a leveraged investment because you bet on the future income of the company. There is no need to enhance this leverage by opting for F&O.

Lost 35 lakh in Stock Market

Another story from IBNLive How I lost Rs 35 lakh in the stock market

Wealth spoke to a man who grew up wanting to become rich, but lost all that he had earned in a flash.

Name: Omprakash Chaudhary (name withheld on request), Age: 73, Where I live: Mumbai

It’s been eight years since Omprakash Chaudhary lost Rs 35 lakh at the stock market. (IBN)

What I do: I used to work in a steel company. Now, retired and resting.

It’s been eight years since Chaudhary lost Rs 35 lakh at the stock market, but he is still recovering from the loss. “The only thing that’s churning in my mind is, I need to recover the money somehow, and pay back all creditors,” he says. Chaudhary had no idea how the markets work. But his younger brother Narayan made good money. So why not him?

The first investment

In 1996, when Chaudhary was 62 years old, he made his first investment of Rs 40,000. He invested in Wipro, Infosys, Associated Cement Companies (ACC) and Gas Authority of India Ltd (GAIL).  ”This was my strategy – buy shares in the morning and as the price shot up, sell it the same day before the clock strikes 3.30 pm,” he says.

His highest one day profit was Rs 30,000. This obviously encouraged him to invest more. It worked well for him. His younger brother, on the other hand, had invested for long term. He hardly did any day to day trading.

The crash

“In 1999-2000, the IT sector went bust and I made huge losses. I would buy shares blindly and sell them in the evening. This habit was a big mistake. I was suffering a loss every day. Worse, I would sell it off before the markets closed.”

Bogus companies

“My younger son would hear the buzz in the market. Little did he know that bogus companies called Ahmedabadi companies were doing the rounds. It seems the promoters were from Ahmedabad and they knew the drawbacks of the stock market.”

“We would buy their shares when the rates had already increased. Then suddenly, these companies would shut down and take off with all the stocks from the market,” he shares. Chaudhary had already lost Rs 10 lakh.

Borrowing to invest

Then came a time when he realised there was no money left to invest. “I started borrowing money from others to recover my losses. This did not help. By then, I owed Rs 25 lakh.”

He borrowed Rs 20 lakh from his younger brother and Rs 5 lakh from a friend. By now, his creditors refused to lend him more money. Today, he is 73 and still trying to pay back his creditors. He has not been able to return his debt to any of his creditors.

Is the stock market for rich people?

Chaudhary believes that investing in equities is a good idea for those who have lots of money. So, even if you lose, there is no problem. Chaudhary is now back to the stock market with a ray of hope in his heart. He has invested in two stocks – Rana Sugar and Maharaja Shree – but their prices have reduced to half in the last two years. He does not favour his sons getting into the stock market. He says, “The stock market is no different than gambling!”

We spoke to Yogesh Chabbria, founder of GSIFS.com about Chaudhary and his first thought was that Chaudhary viewed the stock market as a gamble and not an investment.Here is Yogesh’s advice:

Rule number 1: No day trading

It is a proven fact that those who indulge in day trading, either lose lots of money or they go bankrupt.For any company to prove itself, it takes at least two years. If you are a farmer who wants to grow mangoes, you sow mango seeds in your farm. Next day, your friend tells you oranges will do better. You replace the mango seeds with orange seeds. The day after, another friend suggests apples are the best bet. So you sow apple seeds. In the process, all your money is spent on seeds, fertilisers and other raw materials with no fruit at all. To enjoy fruits, you will have to wait for at least two years.To cut a long story short, day trading has not done anything better for anyone.

Rule number 2: Invest in knowledge

All you need to get into stock market is basic common sense. Buy stocks of a company only if you see their products on streets.If you are planning to invest in a Maruti car, check whether there are Maruti cars running on the streets. If people like the product, it means the company will do good and will give good returns. Since Chaudhary was working in a steel company, he could have any steel company because he has the knowledge of the same. Cement and steel is definitely required for so many constructions coming up. Use simple logic and invest in companies you have heard of. People try hard finding companies. Invest in simple companies whose operations you can easily understand.

Rule number 3: Ignore rumours

If you are confident about the company you have invested in, leave it. Ignore rumours.

Rule number 4: You do not need crores

It’s a myth that you need lots of money to start investing. If Chaudhary had stayed invested with Rs 10,000 in Infosys in the beginning, today it would have been worth nearly a crore.Similarly, today, even if you are investing a small amount in a company you are confident of, it is sure to grow a lot more after 10 years.

Rule number 5: Get professional help

Often, in the haste to get rich fast, we lose patience and make some wrong decisions. Remember, there is always a doctor for your finances, whose advice is medicine for your money.The choice is yours!

 Lessons from the losing in stock market

Is Knife Good or Bad?” think about it. Knife in surgeon’s hand saves life. Knife in another murderer’s hand takes life. People use knife daily to cut vegetables, fruits etc at times cutting their fingers too. Remember the time when you started using knife or you started teaching your children to use knife. Did you tell your children don’t use knife? You would have told them the proper way to hold knife, how to place your hold, how to avoid getting hurt.

Is the stock market gambler’s den?  Sometimes it may seem that you can lose just as easily at the stock market as you can at the gambling table. Ask anyone who has lost money in stock market how they felt after their stock went to zero.  While the stock market is not the same as gambling a lot of people tend to treat it like it is. If you were to just take a list of stocks and throw darts at them, it would be more similar to gambling.If you are picking stocks on tips or if you are in hurry to earn money constantly jumping from one stock to another then you really are gambling. However if you put some thought into what stocks you buy,do your research,make mistakes,learn from those mistakes and come up with a plan then you have a much better chance of seeing positive result than you would have if you went to the casino. However, the more you learn about how companies are valued and operate, the more ammunition you will have when picking stocks.

Like anything worth doing, successful investing takes hard work and effort. Like everything else in life, investing in stock markets (and other form of investments too) have rules. If you learn the rules, practice and play by it you will be winner. But if you try to take short cuts , don’t understand what you are doing, not learning from mistakes then you would end up hurting your  health(financially and emotionally) . Reminds me of Hindi idioms Naach na jaane aangan teda or Khate angoor.Think of a partially informed investor as a partially informed surgeon, the mistakes could be severely injurious to your financial health.

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Do you invest in stock market? Why or why not? How do you plan your investing? Have you lost money in stock market? Did you win or lose your money in stock market? Do you think investing in stock market is like gambling?

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