How to Avoid Losing Money in the Stock Market

        The crashes in the stock market have impacted directly the American financial system from the last 1000 years. The great depression decreased the stock prices. In 1987 crash, each day the overall market for stock and shares fell by the percentage of 20.

Selling After a Crash in the stock market:

        Lack of understanding towards the stock market causes to decrease the wealth of the investors. The capital gain of the stock decrease when prices of the stock fall. An investor who purchased t stock of $1000 worth will only get $250 worth stock by the decrease of 75% in value. The remaining 750 are the loss because of price changes.

Buying on Margin in the stock market:

        Buying on margin is the strategy that can cause loss of huge amounts of money. The buying on margin is to get loans from the bank on interest to purchase some securities. In this strategy the buyer invests his own saving also with the borrowed money. For instance an investor wants to purchase securities of 1000. He will add his saving of $1 with the borrowed amount of 999 on 5% interest. The yield of 6% on ROI will be 11 that is the profit of the owner. The yield generated from the investment goes to the investor and he pays back only amount of loan and interest to the bank.

         The buying on margin strategy is good for the investor when the market rates are increasing. While in market crashes investors face loss. For a similar example if the investment drops to $100 the investor will face the loss of 1000. He will not only face the loss of $1 but also $950 that he has to pay back to the investor. Thus the buying on margin generate the loss for investors. 

The investors take positions on margin to earn more return on investment. Therefore they take large amounts from the banks to purchase such securities. When the market prices go down or financial crisis occurs it turns into the large opportunity for loss. Investor not only loss there personal assets but also cause for bankruptcy. Therefore security exchange commission is setting new rules to overcome this issue.

Avoid Losing Money in the Stock Market

A number of times we meet the people who asked that how they can avoid loss in the stock market. What the investors should do to earn a profit margin?

         The question is valid. People usually keep portfolios with 50 companies stock recommended by their friends or family. They even invest in the companies that have poor fundamentals and weak business. My working experience with Russin for the portfolio management of $40000 supported me to learn portfolio management. We were used to reviewing the stock in details to select the stock that we should keep or sell out. In three year short duration we earned the 2.3 million through this portfolio.

        Through this experience in the investment we find out the major techniques and rules for investment that results in benefit. There are five things mentioned that investors should do to overcome the continuous loss in stock market.  

Compound you winners not your losers:

        Investors face losing because they hold on the losers. The losers are the companies that have poor fundamentals and weak business. The investment is a game. We can predict that the companies with strong fundamental will generate more profit in comparison to loser companies. Therefore to earn high profit margin the investors should invest in companies having strong fundamentals.

At the first investors should classify the companies in four categories.

1.      Recurring earnings

2.      Non recurring earnings

3.      Weak business model 

4.      Strong business model 

The investor should prefer the companies having strong business model on weak business model companies. They should select the companies with recurring earning and strong business models. Thus they can increase the chances of high return on investment.

Always invest in good companies

        Avoid repeating the same mistake by investing in the loser companies again. Invest in the good companies that have dominant market position and have the potential to earn recurring profits. Such companies generate strong cash flows and pay to the shareholder large amount of dividend. Purchasing the stock of the good companies is not easy as they sell out their stock on the high prices. Thus paying too much to have such stock is only not a good idea. Therefore the investor should value the company properly and avoid paying extra money on high prices shares.      

Diversify but don’t over-diversity

        Diversification of portfolio reduces the risk factor for the investors. The investor cannot control the market risk they have only control on the non-market risk. There are the factors as recessions, natural disasters, and interest rate fluctuation that increases or decreases the market risk. Investors sometimes over diversify the portfolio and increase the number of companies that also increase the risk factor. New investors cannot review in detail the portfolio if the companies are more than 50 therefore they take wrong decision.

         A book “Modern Portfolio Theory and Investment Analysis” is written by the authors Edwin J. Elton and Martin J. Gruber.  The book claims that non-market risk can be reduced to 80% by investing only in 20 companies. The best diversification is to invest in just 10 to 20 successful and good companies.

Give your tree time to grow

        The investment process is similar to growing a tree. The investor needs to let the tree grow and deep rooted. The investor should give time to the tree and then after the growth he can enjoy the shade and fruits of the tree. The investor should not expect a sudden shoot up in the market value of the stock. Rather than this the investor should wait to let the market prices increase with the time. Investors should focus on the long term results. They should consider the economic conditions and yearly growth of the companies.

Opportunity is key

        Investors sometimes deploy their money quickly when they get the sizeable cash board because of the fear of loss. However to attain success in the investment the investor should focus on the opportunity as opportunity is key to success. The investors should take the advantage from the opportunity. When the prices go down because of temporary crises they should purchase the stock. Attempt to own a stock on discount prices and wait for the maximization of the return on investment. Understand the market and seek the opportunities to maximize the profit.