Saturday, November 22, 2008

Why The Majority of People Lose Money in the Stock Market

The large profit potential of the stock market brings new investors looking to strike it big on a continued bases. The problem is the majority of people lose money in the stock market.

Why is this? It is because too many people do not take the stock market seriously. Everything in life takes work, you work to create an income, you work to become good at a sport, If you want something to work for you, you have to work for it first. Somewhere along the line people forgot that the stock market follows that basic rule.
The majority of people believe the market can just make them the fast money. It can make them the quick bucks without worrying because the market goes up, on average. The theory that the market goes up on average actually works against the general public.

I have heard people say that they have money they do not need to touch for 6 months so they were going to put it in the SPY for 6 months. Because the SPY goes up an average of 10% a year they figure they can make 5% in 6 months. There are times when false assumptions like this can work and there are times when this thinking can cut your account in half, or worse.

Now that we know why people fail in the stock market let us look at why people succeed. There are many theories out there but there are two things that all stock market professionals worthy of that title will agree on that you need.

1. You need buy and sell signals. You need to have something that you can look at to determine if a stock is a good buy, a good short, or whatever you plan on doing with it. Without some set rules or at least an idea of your rules you are planning on guess work to help you. Having specific rules also allow you to track your performance in the market along with make attempts to improve your success. Remember you cannot track guesswork and you cannot improve it.

2. You need a way to manage your risk. Never under any circumstances should you bet all, the majority, or even half of your account in any one stock, ETF, or Mutual Fund. This is a huge armature mistake and can often lead to large unnecessary losses.

The major reason that you want to not take a loss is to preserve your capitol. To make money you must think of the stock market as a business. In order for you to make money you need money to spend. If you lose all your money on some foolish bet you will not have any capitol left to pull yourself out of the mess you have made.

These two things are absolutely critical to making consistent money in the stock market. All successful strategies need to follow these two rules to be successful. Any so called “Professional trader” who disagrees with them is not a professional trader at all.

For more information about the stock market visit http://www.stocks-simplified.com

1 comment:

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