I will answer the second part of your question first “How do people lose money in the stock market?”, for understanding this we have to understand the few basic concepts and recall the most suitable answers for that.
Ask Yourself: –
1) Why does the Stock Market Exist?
2) How do share prices move in the market?
Reading The first question you might be having different answers like ‘Stock Market exists to make you rich’, ‘Stock Market exists so that we can invest money’ or some might think that ‘Stock Market so that you can trade on your luck and make money’.
Well, Indians traditionally have been pitched like that only and it’s not surprising why Indians call Stock Market as ‘Satta Bazaar’ or Speculative Market.
“In simple terms, the stock market exists to provide liquidity to the securities of companies that raise money from the General Public.”
Now, one simple fact one earns money when the stock price goes up and loses capital when prices go down. The most common answer which people have for this is related to the basic principles of the economy that are supply and demand which is true, but ‘what determines the price of a stock in the long term?’ is something we need to focus on.
There are broadly 2 types of people in the market, the traders who buy and sell stocks frequently and don’t hold stocks for a long time and the investors who believe in holding stocks for a long period of usually more than 2 years.
People lose money in the stock market because they are active traders with no knowledge of the stock market.
I have had the opportunity to work at some of the world’s largest investment banks that are Morgan Stanley and Barclays. I learned there are thousands of algorithms running in the market and to have an advantage over them or to beat them one has to study the strategies which are there and work on them, it isn’t a part-time affair.
In my 15 years long career, I had interacted with a lot of traders and investors. For every 10 people who told me, they have lost money 9 of them were traders. People who trade heavily without backtesting their strategies are the ones who end up losing the most.
If you don’t want to lose money in the stock market try to become a value investor. I know this is the truth and I believe in it. But one must have proper knowledge of before choosing stocks, Warren Buffet in one of his famous books has said “When you own a stock, you own part of a company. So Study what makes a good company”. This study is called fundamental analysis.
Other than this Risk Management is important to identify potential risks and develop strategies to minimize it for getting maximum returns.
I started my journey of a teacher here from Quora. I wrote my first answer 6 months back and today when I am posting this new answer I have 31k+learners.
Thanks a ton, Quorans.
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