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Despite the fact that the general market trend of the Philippine Stock Market is upwards, there are still investors that lose money.
So why do most people lose money in the stock market?
The reason for this is emotional investing.
An emotional investor is an investor who makes emotional decisions based on market observation. To elaborate on this, let us assume that a certain stock is going up. The investors see this and gets excited. They then buy a lot of shares because the stock is doing well. Now, a lot of other investors will also want to get a piece of the action, they will also buy until more and more investors buy the stock until the price increases well beyond its fair value. This is where most investors BUY ON GREED because as the stock rises, the investors become pleased with the rising gains. What they don’t realize is that they are now buying overpriced stocks therefore exposing them to a higher risk.
Now when the stock corrects itself, the investors sees this as a temporary downturn and tell themselves that it’s fine because they are in for the long-term. As the stock fall, The feeling of anxiety increases causing them to feel in denial, fear and despair. When they see that their stock has lost a lot of value, they feel discouraged and tell themselves that the market is not going in their favor so they SELL ON FEAR and cut losses.
Now when the stock is starting a bullish run again, the investors sees hope and relief because the stock is rising again in value. They become optimistic once again and the whole cycle repeats itself.
If you are one of the investors, what happened is that you bought a stock when the price is high and sold it when it was low. The good news is that this is very normal because we as humans are driven by emotions. We are attracted to gains and dislike losses so what happens is that we buy at the wrong times. This is the reason why people lose money on the stock market.
You may want to read how to find undervalued stocks here and here.
To reduce risks, the “Buy and Hold” strategy or “Peso Cost Averaging” is a better method of investment strategy. Basically, this means that we must ignore what the trends say because the market moves in waves. If we ride the wave, we may have a greater chance of losing money. To do that, we must have the discipline and the proper mindset so that we may not steer away from our long-term investing goals.
Happy investing!