We can see huge growth in the stock market in the past 2 years. The participation of new investors has increased extremely during covid pandemic. So chances of losing money also increase. And there are several reasons that new retail investors lose money in the stock market. The main reason is psychology regarding the stock market. Many traders treat the stock market as gambling rather than as business.
Retail investors lose out to other categories of players because they sell winning stocks quickly and they hold on to losing stocks for too long, which found that Indian retail investors chase a zero rate of return on their stock investments when they make decisions by themselves.
The study shows the recurring losses to the types of investors in the “disposition effect”(sell winning stocks too quickly and holding onto losing stocks too long) and overconfidence (take credit for good decisions and attribute bad decisions to luck) for three categories of investors separately.
The losses are equivalent to 0.77 percent of the country’s gross domestic savings a year, says a study. Their findings are based on the NSE data during the period and they look at behavioural biases, investor performance through wealth transfer between investor groups.
The figures you see in case studies are just trading losses and they don’t include commissions, taxes and market impact losses. Other studies show that trading losses capture only 27 percent of total losses for individual investors.
Since on an average they lose more than they gain, traders of retail investors end up being value destroying for themselves and beneficial for institutional investors. Stay away from the market at a distance that is the right way for investors – imply investing through mutual funds or other platforms which trim losses.
The perception has been that the individual, small and retail investor has been less important in the market. The definition of retail investor has changed over time. Since prices of different IPOs can vary, it is based on shares applied for that doesn’t take into account the value of investment in particular IPO by the investor concerned, though it can be an important factor distinguishing the character of different investors.
Experience elsewhere in the world which provides some grounds for regulators to pay special attention to the retail investor, whose exposure in the market either through direct investments or through instruments issued by intermediaries like mutual and pension funds that are increasing.
In those countries, the real difficulty can’t be on the retail investor but it is often uninformed and at times it has irrational behaviour of these investors. Market manipulation resorted by certain large and dominant investors from time to time. It would imply that even India witnessed an increased presence of retail investors in equity and debt markets.
However, in India presence cannot be granted. Retail Investor presence is likely to increase as per capita income in a country rises, since at any given level of inequality, it would increase incomes and surpluses in the hands of those in the middle and upper middle of income distribution from where retail investors can be expected to come. But this relationship doesn’t seem to be exactly the same across contexts and time.
Retail investor participation in the equity market is desirable. It promotes financialisation of savings, that in turn channelized savings from unproductive assets like gold into productive investment, thereby contributing to higher capital formation and economic growth. It enables wealth creators to happen through the capital market.
Here are main reasons why indian traders lose money:
Lack of Information or proper research about company:
This is the best reason for new beginners in the stock market to lose money consistently. They easily follow tips that they get from their neighbours, friends, family members or from financial experts, etc.And on this basis they blindly invest in that one particular stock without doing any research and thus they end up making a huge loss.
This is like a myth for a beginner investor who has just entered the stock market might have. They just want to make double the money within a short span of time. But the beginners are not ready to invest their time in researching a company's profile. They just select the stock on the basis of finance related channel recommendations.
But beginners don’t have time to invest in researching the company’s profile. They select stock on the basis of any finance related channel recommendations. After that they invest a huge amount of money
After that the consequence happens is they lose a sum of money, in particular risky stock or some penny stocks and wish to double their capital within a month.And after that their portfolio stands under 20% .
These are the basic mistakes which a new starter makes in early stages. It can be because of fear of losing money in the stock market. There can be other reasons too, like in the past they made huge amounts of loss or not having enough confidence on executed trades because they invested on trades with other recommendations. To become a successful trader you need to follow proper risk to reward too. Without that you will always end up losing money in the stock market. Because trading is all about research and probability. The main reason is they don’t follow proper risk management of money. They keep losing trade forward in dreams of making that trade profitable and not put stop loss. They cut winning trade early without dragging the stop loss.
Nowadays, a trend is being followed by new investors to directly jump into intraday and short term trading without having success in the cash market. Because intraday trading is more riskier than the stock market investment. They participate because they feel trading in the short term makes them rich quickly.
Generally, people think getting two or three trades profitable makes them successful. But in reality it cannot be true because in intraday when you trade with more margin the one stop loss would be enough to wipe out your whole account.
We can see that newbies nowadays who directly start trading in the derivative market end up losing the whole amount. And after that revenge trading gets started where they think they can recover losses but instead they lose all their capital.
Today’s generation is not at all ready to give time to the stock market. They all think to grow their capital as quickly as possible. They don’t know how to trail stop loss and maximise the profit. Many traders rush to book their profit or make trading decisions in a hurry which is one reason which is why they make losses in intraday trading. Many traders book profit without deciding their price targets or stop loss. Also, being impatient and changing trading strategies frequently is one of the biggest mistakes that intraday traders make.
For example, You might be aware, 2008 witnessed one of the worst corrections in the history of the stock market. Many inventors panicked and sold their investments for heavy losses as if there was no tomorrow. However, those who remained invested were rewarded immensely as the market recovered in less than 2 years.
However, unhealthy developments emerge which deserve serious attention. Large number of newbie retail investors have taken into speculation in hopes of becoming rich quickly.
Scores of youtubers have sprouted largely, that attract newbies into training programs and tempt them to get rich quickly by trading in stocks and derivatives.
There are video ads that “Bring 20,000 Rs and earn 5 lakh”. How I made 50 lakh rs from stock market” and such outlandish claims. Unfortunately, large numbers of gullible newbies are walking into this trap.
It is a well-known fact that most day traders and speculators in equity derivatives lose money.
The founder of India's largest firm stated that 95% of day traders and derivatives always lose money.
Yet, the prospect of getting rich is tempting tens and thousands of newbies into the stock market speculation.
But since then, markets have turned volatile and traders steadily lose money. Going forward, most of these money speculators lose money in the big roller coaster market. History repeats again and again!
A healthy gain suddenly rises in the number of mutual investors. It is a fact that most retail investors don’t have expertise to invest in the market successfully.
For them, the best answer can be to invest through mutual funds. It is heartening to note that there is healthy growth in AUM of mutual funds.
It is a proven fact that SIP is a safe and profitable investment method.
The amount under SIPs have grown from 8000 cr before pandemic with 13000 in October 2022. No doubt that these investors will gain.
There’s a high profitability of India’s GDP and market cap rising to $8 trillion and $10 trillion respectively by 2030.
Potential wealth creation through the stock market in ten years can be three times the wealth created till now. Patient investors will reap the benefits of the “Indian Growth Story”.
On the other hand, millions of traders blow up their portfolio, and turn out empty handed, especially when they use leverage. For example, the United Kingdom FCA requires brokers to disclose the percentage of their accounts in the region that are unprofitable derivatives.