Hundreds of people lost money in stock market in 2008 global financial meltdown.
After those terrible experiences in 2008, people are still afraid of investing in stocks.
Losing money in stock market is not a rare phenomenon, but we must learn how to manage this risk of loss.
During years of 2009, people used to give me frowning comments on my blogs related to stock investing.
But I can understand. It takes time for wounds to heal.
But people cannot avoid investing in stocks altogether.
After all, this is one investing option that can give fantastic yield.
The only care one has to take is to learn to manage the risk of loss.
The returns that stocks can give in long term are unparalleled.
So, what is the suggestion for people who have lost money in stock market?
The main reason why people do not succeed in stocks is because they invest blindly.
Investing in stocks, the way most people do, must be avoided in first place.
An investor must first know almost everything about company.
At least the financial history of the company must be thoroughly studied.
What is essential to know about a company is its fundamentals.
Market price valuation of a fundamentally strong companies must also be learnt.
People who are losing money in the stock market are one who buy stocks without studying its fundamentals and price valuations.
People must ‘buy fundamentally strong stocks at undervalued price levels’.
If we follow these two simple rules, losing money in the stock market will become nearly impossible.
Yes its true, for some people losing money in stocks market sounds like a joke.
These people smile at other who says stock investing is risky.
If rules are so simple, why we hear so many stories of lost money in stock market…?
Stock investing is simple, but there will always be speculations attached to it.
There will always be people in this world who will continue to play stock market as gambling.
When people buy stocks with a HOPE to make gains in future, makes stock investing speculative.
These people rely on ‘hope’ instead of applying right skills of stock investing.
Learning the right skill is not difficult at all.
Then why people rely on HOPE instead of depending on an empirical calculations?
This stock market is full of good and bad stocks.
Good investors buy only good stocks and avoid bad stocks.
But to know which stocks are good, one need to learn a small skill.
This skill is learning to read financial statements of companies (balance sheet, profit & loss accounts & cash flow statements).
When people trade stocks without this precondition, they are only investing with a HOPE.
Consider this example:
1) A company (ABC) which is fundamentally so healthy that in next 5 years it will grow its profits at rate of 15% per annum.
2) Another company (ADE) which is fundamentally in bad health.
In next 5 years it can grow its profits at rate of only 1% per annum.
3) Stocks of both these companies trade at market price of $20/share.
4) As an investor, which stock you will prefer to buy?
The answer is very simple.
Company ABC looks a far more lucrative prospect than company ADE.
But this realisation comes when we see the companies profit history.
Where one can find companies profit history?
Its available only in companies Profit & Loss accounts.
Hence, learning to read companies financial report is essential.
It will not be wrong to say that lots of people share huge distrust in stock investing.
To such people there is only one advice, they must improve their knowledge of stocks.
Investing blindly (on basis of just a hope) in stocks will continue to build more distrust.
But this is also a fact that the whole investment industry is supported on peoples ‘hope’.
The hope of faster money multiplication.
For any reason, if this hope of people gets hurt, the whole investment industry plummets.
This is what happened in 2008.
The solution lies in building investment know-how.
Replacing hope with knowledge will ultimately lead to less people losing money in the stock market.
We cannot expect everyone to become a master of stock analysis.
But for people who are really focused on making money from stocks, must learn the art of fundamental analysis and price valuation.