3 Reasons Most People Lose Money in the Stock Market

Once upon a time, job security was financial security. Those days are gone.

Millions realised it, thus, igniting a sincere desire to create multiple sources of income. Today, the stock market remains a popular destination for many who want to get ahead financially. However, despite having sincere desires, 90% lose money attempting to make money in the stock market.

Regrettably, for most, it marks the sad end to their venture of achieving the financial success that they truly deserve. If you are reading this, I believe, you have a desire to be among the 10% who wants to make money consistently in the stock market.

If that is so, I will share, in brief, what the 10% know and do differently from the 90% so that you will move one step closer towards investment success.

Here are the three reasons why most people lose money in the stock market.

90% Do Not Have a Game Plan

The 10% of people who profit consistently from the stock market have a well-crafted game plan before investing. The rest of the 90% choose to invest their money without having a game plan. It is like going to war without a battle strategy.

So, what is a game plan?

It is one that outlines your objectives, desired returns, potential risks involved, multiple exit strategies, and a purposeful action plan crafted based on your current goals, background, preferences, characteristics, and financial status. It is quite personal and requires some soul searching before investing money into anything.

The 90% disregard it as they intend to make a quick buck. Most fail, unfortunately. So, don’t let it be you.

90% Do Not Read Annual Reports

The 10% read a lot of annual reports. Why? This is because, if you are a stock investor, you want to know as much and as intimately as possible about a stock’s businesses, its financials and its future prospects. These information are contained in a stock’s annual reports which the 90% who lose money do not bother to read.

If you are new, you might be overwhelmed with how thick the documents are. Don’t fret. I started with stocks that are involved in simple businesses like retail or food and beverage manufacturing where their annual reports are usually reader-friendly.

Here are two places of the annual report to focus on:

1) Financial report – this tells you whether the stock has a track record of making money in the past.

2) Chairman’s statement – often, you will find discussions about a company’s plans to grow its businesses in the future.

90% Think That It Takes High-Risk to Generate High-Returns

‘High Risk, High Returns’ is coined by financial professionals such as unit trust agents and financial planners with regards to making money in the stock market. I believe it is a huge misconception.

First, true stock investors are conservative by nature. They do not just invest in any stock that is listed on the stock exchange. Stock investors are selective in the quality and the price of their stock investments.

A good example would be Warren Buffett. He invests in great companies as long as they are offered at great prices. That is how he makes his money.

Second, professional stock traders are also conservative. This is because they have crafted a trading plan and would trade a stock if it has a greater chance of profit than loss. This is known as the risk-reward ratio.

Most of 90% who lose money do not have a risk-reward ratio calculated beforehand and thus, are butchered mercilessly in the stock market. It does not have to be you.

Suffice to say, the 10% think very differently from the 90%. If you are new to investing, it is best to find out what the 10% think or do differently so that you too can achieve the same level of results that you truly deserve.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.