Why Most People Lose Money in the Stock Market

By: Adam Khoo

Mention the word 'stocks', and many people have painful experiences to narrate. Stories abound of how people have had their life savings wiped out overnight. Or money they have borrowed to buy a 'sure, hot stock' was lost when the stock suddenly took a nose dive. Ever since I was young, my parents and grandparents warned me to stay away from the stock market, and tell me that it is safer to leave my money in the bank.

So, is it true that most people lose money buying stocks? The answer is Yes! But how can this possible? We know that the stock market as a whole has been consistently increasing in value for the last fifty years at an average rate of 10% and 12.08% in the last twenty years! The main reason is that most people who purchase stocks are ignorant of the business behind the stock. It doesn't mean they are not intelligent people. It's just that they lack the 'financial intelligence' to understand, analyze and buy businesses.

Let me ask you this question? If a whole bunch of people with no advanced driving skills were given the keys to drive a Formula One racecar at 230km per hour round a circuit, how many would crash after a few rounds? Probably most of them! Well, this is exactly what is happening in the stock market today! The majority of investors are made up of the general public who enter the market looking for riches without any financial or business training and, as a result, crash and burn! To these people, investing in stocks is indeed a high risk, sure-lose venture. They treat the stock exchange like it is a casino.

So without financial and business training, how do most people make decisions on buying and selling stocks? The answer is based on fear and greed. It is the combination of ignorance, fear and greed that motivate people to buying a stock when the price is too high and selling it when the price is too low, resulting in a loss.

We have to know that when we buy a stock, we are actually buying a share,
an ownership, in an ongoing business. Instead, most people treat stocks like lottery tickets, buying and selling based on predictions of whether the price will go up or down in the short term. Because stock prices go up and down randomly and erratically based on world events, there is no way anyone can consistently beat the market by attempting to read! Which is why, in the long term, the average stock player loses money.

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