Understanding loss in stock market
The ultimate goal of a trader or investor in stock market is to make profits No one wants to make a loss, but loss is an integral part of stock market as we have seen earlier
The ultimate goal of a trader or investor in stock market is to make profits. No one wants to make a loss, but loss is an integral part of stock market as we have seen earlier. One can minimise loss but can never avoid loss. In stock market you invest money and you earn money. Money is the product which you invest and earn.
Warren Buffett says rightly ‘never lose money’. A trader who loses his capital in stock market will only be left with the option of advising other traders. Even if you have the technical knowledge about markets and an in-depth understanding of what the stock market is, it is futile if you don’t have the capital with you to invest. So, the capital you have is very precious and one cannot afford to lose it.
Share market is a business and as any business in general, it has profit and loss. Also, in business there would be expenses like salaries of the staff, electricity, rent etc. Under the assumption that a company is running in profits, expenses have to be deducted from the gross profit and what remains is the net profit. Whereas in a stock market you don’t have many expenses and what remains is the total profit. Minimal brokerage charges are levied on your trade that is the only expense you have to bear.
If you consider stock market as a business and subtract lost from gross profit you get net profit. There is an element of probability in stock market. Profits are based on your experience, technical analysis and knowledge you possess. The higher the experience you have in trade market, the probability of earning profit is more. But still you are bound to be at loss at any point of time. That is precisely where one can say that in stock market probability plays a key role.
There isn’t a single trader who has never experienced loss. To minimise loss you need to understand the trend of stock market. Just as a kite best flies in the direction of the wind so is the stock market which follows the trend. When the market is in green, we tend to sell our products and when the market is red we try to do bottom fishing. This principle is quite contrary to the functioning of the stock market. The trader needs to take decisions based on the trend of the market.
Just as every cricketer cannot score a sixer for every ball, a trader cannot get a good profit on all his trades. He will have loss in few trades or he may earn a little profit in few trades. Moreover, market gets affected by other factors such as global market conditions, political scenario, trade wars between countries and several other factors. In such a scenario a trader needs to be defensive and should strive to protect his capital. An intelligent trader will study the market after closing hours, analyse the global market conditions and plan the stocks to be picked on the subsequent day even before the markets are open.
A step by step approach is inevitable in stock market to play safe and to reap profits. (The author is a homemaker who dabbles in stock market investments in free time)