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This was a question that was asked to me on Quora ” Do most people lose money in the stock market and how?”. Below is the full question and answer. Also feel free to follow me on Quora here
Question: Do most people lose money in the stock market? What percentage of people lose money in the stock market? How?
Answer: I could just type either a yes or no and leave it at that but lets take a deeper look at the question. The sad reality of the stock market is it can produce the extremes on both sides. Right now there is probably a trader ready to jump off a bridge from trading losses while another trader is sipping Crystal in a private jet from trading wins. The real question is what separates these two. After all its the same market for everyone right? Here are a few areas why I think traders/investors get it wrong from the start.
No End Game -Most investors/traders have great ideas but they have no end game or exit strategy. If you buy a stock the main goal is to sell it for more than what you paid for it. This may sound elementary yet there were trillions of profits wiped out in both the dot com bubble of 2001 and the credit crisis of 2008, all from investors who did not sell positions or refused to take profits allowing all those gains to vanish. The saying is ” You haven’t made a dime unless you take the profits” You can have a million dollar trade but unless you book some of that profit its just a bunch of numbers on a statement that means nothing, numbers that can easily vanish in a market correction. Wealth isn’t built on gains its built on taking profits. Otherwise its as if they never existed at all.
Change- Nothing lasts forever and that is especially true in trading or investing. The stock market is an ever changing animal. The stocks or investments that are hot today may be worthless next year.( More of a reason to constantly take profits) The way we do business today may radically change in the future. When I first started trading stocks were still listed in fractions not cents. Most trades were done via the telephone and not by the click of a button like it is now. And there certainly was no social media or High Frequency trading firms around in the numbers they are today. Each one of these events has changed the way we do business and make trades. The way we access our information has changed and the way the stock market behaves has changed as well. If you don’t change with it you will go backwards
Accepting The Real– Some people feel the need more than others but for all of us to some degree we feel the need for something to make sense and if there is something that does not make any sense at all is the stock market. Let me explain. Lets say you research a certain company diligently and you feel they will grow exponentially. Based on that information you decide to buy the stock. When the company reports earnings you were right , their profit grew triple or quadruple yet the stock tanks. You don’t get it so you hold but it keeps going down and down but you wont sell the position because you don’t understand how it could possibly be going down so much when everything about the company sounds so good. However, in this situation, the only thing you should understand is that you are losing money,that is the reality. In other words people lose money because they trade what they believe not what they see. Most people cant separate themselves from this emotion. For those reading that do not believe me about the market being irrational or not making sense just look at the charts on the following stocks GENE DGLY LAKE VLTC PBMD you’ll see what I mean
Education – Education will be the sole source as to weather or not you will win/lose money in the stock market. I don’t mean high end university education or a current profession that required a substantial amount of education to achieve such as a doctor, engineer etc. You need specific stock market education if you intend on keeping your money and becoming rich. Too many people neglect this area. They feel they can read a few articles in money magazine and get by or if they are good with numbers they can figure this out to. I dont care how smart you think you are you can not compete with algorithms, hedge funds, highly funded institutions and market manipulators without taking the necessary time to educate yourself. If you are not willing to do that then don’t even bother trading. Sure you may learn along the way but chances are you will run out of funds before you turn the corner
The stock market can put more wealth in your pocket than just about any other career out there. In fact the majority of the worlds richest people are tied to the stock market in some fashion However, there are no short cuts. You can have all the success you want but you are going to have to work for it. As a full time trader and a stock market teacher Im surprised on how many people enter this field under the expectation that its a place of easy money. Once people find out its not many of them just quit. That is why the turn over rate is so high. Not because they cant it is because they underestimated it.
So the answer to your questions are
Do most people lose money in the stock market?- YES
What percentage of people lose money in the stock market? 90%
How? By not following what I listed above.
If most people would just take the time to educate themselves and learn the failure rates would be cut in half.
Best of success to you
Doug
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