Over the years, I have earned money in Stock Trading and I have lost money in Stock Market. Also I know of only 2 or 3 persons who have become rich by trading in stocks and it is their full time profession. This means that it is pretty difficult to become rich by doing stock trading. It was this interesting observation before me which made me study the question, “Why People Don’t Become Rich by Stock Trading”.
Reasons to find answer to: Why People Don’t Become Rich by Stock Trading
Most of us want to become rich and Stock Market Trading is one of the tempting options. Many people get lured and try their luck. The aim of my research was to improve chances of earning and to minimize the losses. Of course, it is not always possible to avoid the situations which lead to losses as volatility and uncertainty are the features of stock market.
My methodology to find the answers
In addition to studying a lot of blogs and watching videos on You Tube, I also enrolled myself for crash courses on the subjects like: Learn Stock Trading, Learn Options Trading, Learn Online Stock Trading, Learn Investment Planning etc.
This gave me many interesting opportunities to speak to the experts on the subjects who were teaching and also the fellow participants. Normally the participants already had sufficient experience of stock trading as well as investing in mutual funds. They had come either to enhance their knowledge and get some new techniques or to understand where they are going wrong, in case they are.
Well I came across many interesting answers backed with actual experiences of people. While some answers were convincing and logical, some were irrational or illogical. Obviously, I ignored the irrational explanations.
Why People Don’t Become Rich by Stock Trading
Here are some of plausible explanations grouped under a few broad headings:
It is quite natural for human beings to be greedy. We want to get rich and that too very fast. We dream become rich overnight, even though the investments in terms of capital, knowledge and time are small.
2. Lack of knowledge or little knowledge
It is very difficult to predict exactly and every time which way the stock prices will go. Perhaps no one can be 100% right. Only with the help of regular technical analysis and study of fundamentals of the stock market and individual stocks can you make intelligent guess about the direction or the trend in which the stock prices will move.
Hence it would be foolish to jump into the business of stock market without learning thoroughly the Fundamentals of Investing and the Techniques of Forecasting the Prices.
3. Investing based on “tips” only
Many new investors or traders take advice from wrong sources such as colleagues, friends and relatives. Naturally it would be wrong to assume that they are professionals in Stock Trading or Financial Investments.
Even if their tip is correct, it has to be acted upon at the right time for entry, booking profit and even putting stop loss because it is all about right timing in the stock market. Obviously the stale tip and do much damage than give any profit to the trader.
4. Use of Leverage Facility
Another name for Leverage is buying on margin. Many stock brokers or trading platforms readily allow you to buy or sell stocks up to 10 times or even 14 times the value of your capital. This means that with a capital of 100 units of money, you can do intraday trading of 1000 units. Naturally it is a gambler’s luck if you make 10 times more money in a few hours. But if you had to book loss on that day, that too would be large, In other words, if you were to lose $5 with your own capital on a bad day, now with the margin trading done by you the loss would be $50 – 10 times more.
5. Lack of Patience
Impatience is likely to make a person take incorrect decision, to put it mildly. You have to give a stock couple of years to increase in value so that you can get a good price to sell it off on a profit.
On the contrary, there is intraday trading to suit the mood and styles of impatient. That is why many people who lose money in the stock market do not have patience. When the value of their stocks starts to decline they get nervous and they sell it off at a loss. But if they had waited a little longer, they would have made decent profit.
Sometimes, people are impatient while choosing a good stock and they end up investing in a not a good trading opportunity.
Is it possible to become Rich by Stock Trading?
After so many convincing reasons why people do not become rich by trading in stocks, there could be a follow up question also. You may want to know: Is it possible to become Rich by Stock Trading?
Well the answer is that people like Warren Buffet are the living proof that one can not only survive in the stock market but actually make a lot of money. After all to rank among the top 5 richest people in the world, year after year and this is no joke or coincidence.
Here are some important tips or lessons if you want to become rich by investing in stocks
1. Don’t be greedy
Invest in the intrinsic value of the company. Mr. Warren Buffett says, “When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.” He takes minimal risk rather than high risk and potentially higher profit option.
2. Have patience
Our greed and impatience sometimes makes us set unrealistic targets which are not achievable. Therefore, it is important for you to set targets wisely. Mr. Warren Buffett says, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Mr. Warren Buffett usually has a very long investment horizon or holding time period. According to him, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
3. Acquire lots of knowledge
You must acquire thorough knowledge in the areas of Fundamental Analysis and Technical Analysis of Companies, their Stocks before trading in their Shares. Also keep in mind that knowledge will not come quickly, it has to be acquired from various sources. Secondly, the knowledge needs to be regularly updated too.
4. Use your own money
This is basically to save you from increasing the size of your total loss if you were trading on margin (using leverage). Leverage is the sure way to wipe out your capital fast.
Once again, Warren Buffet’s quote fits in very well here, “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
A word from Author
I am not an expert on the stock markets, nor do I claim to have become very rich by stock trading. But to support my arguments; I systematically collect information, do careful planning, adopt a conservative approach and conduct deep research coupled with patience. This has helped me to avoid losses and book reasonable profits over a long period of time.
I am passionate about helping new investors and traders so that their hard earned money does not go down the drain.