Do you find yourself asking this question – ‘Whenever I buy shares, the price of that share only goes down? Why?’ Well, if you do, you are not alone. Countless investors, traders, and newbies in the markets constantly fight similar thoughts.
Online brokerage and the internet have revolutionised stock trading. In just a few minutes, you can trade and invest in the stock of your choice! While the ease has increased, the kinds of problems that can crop up have also compounded. Individuals easily open Demat accounts but do not realise how to invest or make profits. This is primarily because most of these investors are unaware of the web of factors that influence a stock’s performance. They constantly try to time the markets and invest without researching.
We have tried to decode the several factors that may have caused your investment to decline. Let us have a look.
You view stocks individually
Most investors view shares singularly. Their sole understanding is that if the company is making profits, its share price would automatically appreciate and vice versa. But, this is not true and is a flawed way of understanding the stock market, its functioning, and its systems.
Stock Market movement is influenced by countless factors, ranging from the economy, market mood, domestic affairs, policies, elections, and oil prices, to international factors like currency valuations, elections in other countries, rates set by the Fed and other central banks, etc. One can look at various live examples to understand this.
For instance, when the GOI banned the import of ACs in 2020, companies that manufactured them saw a sudden price boom. Another example can be the tech crash on US indices in 2021 (NASDAQ and S&P) which spiralled into a crash of Indian tech stocks as well. Also, when the Covid-19 pandemic tanked the US, Japan, and Russian stock markets, Indian indices suffered the same fate, crashing 3000 points in just one day! US President Biden winning the 2020 elections caught the markets in a sour mood, which then crashed a few points.
The very latest example can be the Ukraine-Russia war, which sent oil prices (per barrel) to over $100 dollars, indirectly triggering a market crisis and stroking sentiments of fear and uncertainty. Another example is Deepak Nitrite, a well-known chemical company that shed ~10% in just 5 trading sessions when the Gujarat Government issued a closure notice to the company over an explosion at one of its plants. Do you now observe how stocks never move in a singular fashion?
As an investor, you need to understand that various controllable and uncontrollable factors guide stock movement. And if you do not study the market in detail and invest randomly, you are signing off on more losses than gains.
You do not understand stock market cycles
Stock markets are never linear. They always move in cycles of booms and busts, highs and lows. No stock is always climbing high on the charts. At the same time, no stock can keep falling. All stocks work in cycles and remain influenced by several factors, as mentioned above.
And when you invest in the stock market without understanding the basic fundamentals of its cycles, you are likely to return disappointed. The 2008 housing crisis was followed by an excellent bull run a few years later. The current bull run, post-Covid-19, has been halted with bears guiding the markets, as Sensex fell from 60,000 to ~55,000 in just a few weeks.
Now, you would most likely be aiming for your stock to keep climbing higher and higher on the indices, but that’s not likely to happen. To understand the stock cycles better, read our article on ‘cyclical stocks: things you must remember while studying them‘ on the Teji Mandi blog.
You give more importance to emotions than facts and figures
When was the last time you read the balance sheet or P/L statement of a company? Or religiously followed the news or a stock’s movement before investing in it?
The majority of investors do not read company documents like cash flows, P/L, ratios, etc. They hardly recognise the company’s liabilities and assets. Such investors give more importance to their emotions about a stock than the reality. A good example here can be the Yes Bank stock.
When the company CEO Rana Kapoor stated roughly that ‘Diamonds and Yes Bank are forever and that he would never sell a single share’, he stroked a sea of emotions for investors across. Yes Bank’s shares traded around Rs. 250-Rs. 300 at that time. However, none of the investors bothered to see where the company’s income came from or where the money was being employed. Now imagine you had bought a piece of the share at that time. Where do you think your investment would have been today? Currently (as of June 2022), Yes Bank trades at ~Rs. 13!
The market is filled with countless such examples! Investors who give higher importance to emotions than reality never succeed in the markets.
You are constantly experiencing the fear of missing out
The investing world is constantly changing, offering individuals a new range of investment products. People on the internet and social media go out of their way to promote a new product or service. Cryptocurrencies can be a prime example of the power of the internet and FOMO.
But what’s FOMO? In terms of markets, fear of missing out is an emotion where you constantly feel that you are missing out on a great deal or investing opportunity. It is a behaviour that compels you to enter a particular product or market immediately, and if you don’t, you will regret it later. It may not matter if it is clearly visible that the deal or the stock is risky or dubious.
FOMO has become the guiding principle for a majority of newbie investors. Whenever the investor feels that his counterpart has got a good deal in hand, suddenly he wants a piece of the cake too. It would not matter if the stock has been failing on the markets or has had a dismal record. If everybody is investing, then the choice is right.
IPOs and certain multi-bagger stocks can be excellent examples here. Gen Z companies like Zomato and Paytm were much-hyped pre and post-listing. However, their performance and ROI have been abysmal, to state the least. LIC (Life Insurance Corporation of India) can join the list here as well. The newspapers also remain flooded with headlines of penny stocks returning 100X, 700X, etc., instantly creating a feeling of FOMO.
Such decisions, more often than not, end up disastrously. If you are buying stocks out of a fear that you will miss out if you don’t invest, then you are more likely to feel the pinch of loss.
You do not use fundamental analysis
A majority of investors can be guilty of not fundamentally understanding a stock. Fundamental analysis is a holistic approach toward understanding the company’s functioning from the lens of economy, industry, and sectors or, in other words, the macro factors. For example, looking at the economic factors, you can analyse that buying cement company shares in a recession period may not yield profits.
Fundamentally good stocks always perform well. Sure, they may undergo tides of high and low like any other stock, but in the long run, they are your true wealth creators. If you are investing in random penny stocks without research and expecting them to turn into a multibagger, then you may be in for a rude shock.
To get the detailed tips and tricks of fundamental analysis, read our A-Z guide on analysing stock fundamentals on the Teji Mandi blog!
You do not read the technicals of a chart
A very important nuance of the stock movement is technical analysis. This analysis uses historical data of a stock movement to predict future movements.
Technical analysis is a tool which, if wisely employed, can help you make money even in falling markets! How, you may ask? Simple. Technical analysis can help you with stopping losses, right entry and exit points, breakout, trends, and more. When you understand them, you will also understand why a particular stock is falling or rising, when you should enter and exit, and when is the right time to go short (sell) or long (buy).
Now, the majority of investors do not understand technical analysis, and naturally, they do not enter or exit the stock at the right time. For example, assume that ITC is trading at Rs. 200. You feel this is a great price to accumulate this stock. However, you do not read the stock technically. Now, technical analysis of ITC says that it will fall to Rs. 180 in the next 5 days. You neither have a stop loss in place nor any idea if the stock will appreciate. As predicted, the stock falls. You will then have to bear the loss.
Employ more of the technical analysis and watch your complaint of ‘whenever I buy shares, the price of that share only goes down’ slowly evaporate!
Many investors turn to TV channels for news on stocks and indices. These TV channels have people who constantly analyse the markets and give advice to their vast audience. Now, if you blindly follow whatever these ‘Stock Gurus’ state, you are inviting yourself trouble.
Not just TV channels, with the advent of the internet, stock gyaan is freely available on Instagram, Twitter, Discord, Telegram, and more such apps. Most – if not all – information lacks proper research, is fake, or has some other motive behind it that may have harmful effects on your investment. You have to remember that SEBI has strict guidelines on stock and investment advisory in place. No random person can use a channel and give stock advice (you need to be a registered advisory with SEBI for that). Most of the advice (from social channels) is bogus and is a way of scamming your money. Be very careful before you implement any advice or scheme you see online; if not, you may become a victim of fraud.
Do your own research and only then invest in any stock. If you implement advice from Stock Gurus and find your share price falling, you have no one to blame but yourself!
Stock markets are tricky, and nobody can accurately predict their movement. However, if you wish to succeed in the markets, you need to understand that stocks move in cycles and are influenced by several factors. Learn how to analyse a stock fundamentally and technically. Avoid FOMO and running behind Stock Gurus and social media channels. Understand that share prices do not always climb up and up. Do your research, assess your risk appetite and only then invest.
Teji Mandi is a Sebi-Registered Research Analyst. The experts at Teji Mandi are trusted by more than 10,000 investors. Reach out to us through our website to get active investment advice on building your stock portfolio to achieve your financial goals seamlessly!