Updated date:

How to Avoid the Risk of Losing Money in the Stock Market

how-to-avoid-the-risk-of-losing-money-in-the-stock-market

Buying stocks brings lots of risks along with if you are not aware of potentials mistakes while trading in the market. With that said, these risks deflate your trading balance from the hard-earn cash. If you are a beginner in this field, know some tips to avoid the risk of losing money in the stock market. Or if you are a trader who already has experienced a heavy loss, learn what you have messed with.

Do not rush to the mass

There are several of you who join the group easily just because you believe what several people do. But the majority does not always win, especially at least in the stock market. If you find the market volatile, take your step back even though the majority disagrees. It is just a matter of economic situation, market run, and other factors that wrap the fate of investors.

People consult with several others in personal life to make the right decision but stock traders should not do that as it only creates confusion and chaos. However, you can get saved from losing money in the stock market and get benefits from experienced traders or experts if you follow them unlike those who pass general notes.


Avoid the myth of past performance

Before investing, you hunt some data and make a proper analysis of the stock market. But you should not buy a stock based on its past performance as the stock market runs in phase. It means the stock does not stick at one position- it seems to reach high at one phase but suddenly drops in the next phase.

The performance of stocks depends on the company’s movement and the country’s economy. If the country’s economy is strong and doing well, the stocks go up, and return will be at a profit and vise versa.


Exercise the diversification

Just as they say that carrying all eggs in a single basket is risky to reach the destination, investing all your money in a share or stock will let you down. It is risky betting as if the stock performs well, you will reap a great number of returns, but if it fails, you must face heavy loss. And it is not guaranteed that a single stock makes you always win.

But if you invest in various and more than one sector, there are lots of chances to compensate your money if one or two stocks underperform. That’s how diversification helps you out in such an unpredictable situation and saves you from losing money in the stock market. But do not over-diversify as possessing too many stocks in a portfolio may harm a significant value for you.


Invest with long term horizon

Everyone wants to be rich quickly and invest their money for a short period. But does not work in the stock market as the company needs time to settle in good condition. If you analyze the 40-year journey of Sensex, it will show you that the longer time you wait, the lesser chance of losing money in the stock you have. If you had traded in Sensex for an initial one year, you would have had a 33% probability of losing money. Like that, if you had invested for 5 years, the chances would have been 8%, then 3% for ten years, and for 15 years, it would have been a 0% probability f losing money respectively.

So try to be a smart investor and invest hard-earn money for the long run.


Take risk under warrant stocks

Soldiers get training and prepare for the worse and chaotic situation of the country. Also, battleships are designed for the same purpose- to protect the country from the invading force. The stock market also happens to face adverse conditions many times and it is time for investors to use intelligence. Designing a strong portfolio in mind, investors should be already ready for hard times and worse market downturns. It helps you develop risk management inside and avoid the risk of losing money in the stock market.

For instance, Equity markets are always volatile and are believed to be so in the future continuously also. It was the time when Equity markets were correct more than 50% during the early 1990s and the time of the 2008 Global Financial Crises. But the situation has changed now and now, the correction rate has been dropped by 15 to 20 percent.


Identify the stock market cycle

It will be beneficial for you to know what phase the market is in, to trade smartly. Identify the market’s position, whether is trading or trending and you can deal with breakouts accordingly.

Use the historical data and adequate research to understand the stock market cycles. The stock market runs through a cycle or process; bull market (rising) and bear market (falling). Understanding market cycle, growth, and process help you migrate your investments safely and you can avoid the risk of losing money in the stock market.

Respect valuation

The market is full of stories, gossip, and narratives, and investors get easily tempted by high returns. It always makes you stand between euphoria and pessimism and your mood falls in between, it will be not related to ground reality. You are blindfolded with myth and do not know what are you investing for.

You pay at price and get a return in value in the stock market. And the future returns depend on what you invest in at the entry stage. So, respect the value, not noise.


Don’t make misconception about unfavorable events

Unfavorable events do not necessarily cause always a bad impact on the stock market. It depends on the nature of the event that can direct your betting in the market. For instance, the Gujrat earthquake in India, which was speculated to devastate the country's economy and cause the stock market to die. But it turned the opposite as investors received compensation from the cement and construction industry.

So, you should analyze the possible consequences unfavorable events can make on the economy overall. Then, you can come to a logical conclusion and save yourself from losing money in the stock market.

Related Articles