Dark sides of the Stock market that you should avoid in 2022
What is the purpose of the stock market?
To complete large stock market projects, large corporations require large sums of money, which are not available to individuals. People can put their money into businesses, and businesses can use it to fund innovative ventures, and the investor becomes a shareholder in the industry.
If the company makes a profit in the future, a percentage of that profit is credited to the investor, and if the company loses money, the investor bears the loss. This is the danger.
The stock market appears to be a fantastic way to accumulate riches. There are numerous stories of successful stock market investors in India (and elsewhere) who have made large sums of money. However, there are many unpleasant truths about the stock market that most successful investors and analysts choose to ignore.
No stock can guarantee a profit.
Even the “bluest of blue chips” can “underperform” and “not” provide any return over a long period. No matter how secure it appears to be, any stock you invest in carries a risk.
There are thousands of factors that might influence a company’s stock price. For instance, the economy (local or worldwide), industry, the fundamentals of a company, technicals, new rules, taxes, social and political dangers, etc. If someone promises you a sure return, he’s either inexperienced or lying to you. The best you can do in the stock market is to reduce risk by making calculated, “educated” judgments.
1. Fear and Greed drive the stock market.
Stock market participants are prone to succumbing to greed and anxiety. People become optimistic and greedy when everything is going well – a healthy economy, high employment, the government making favorable policies, etc. After all, we all want to amass as much wealth as possible in as little time as feasible. As a result, stock prices are mispriced. It is difficult to sustain a long-term strategy and keep to the fundamentals due to the investor’s overwhelming desire (greed).
When things are terrible, the economy isn’t performing well, and the market is losing money for a long time, people become too defensive (thinking the market/economy will continue to collapse indefinitely).
The market is driven by greed and fear, which causes most stock investors’ “decisions.” Although most GURUS will disagree, the truth is that controlling your greed and fear to make a solid investment decision is quite tricky.
2. Corporate executives may be able to control their profits.
Yes, corporate executives can and do manipulate their earnings. This is one of the unpleasant realities of the stock market.
Everyone wants to put money into a fast-growing business. What more significant indicator of growth than a company’s earnings constantly increasing?
When the market begins to expect remarkable results from the company quarter after quarter, it puts a lot of pressure on its management to deliver on those promises. When they fail to do so, they may distort their results to avoid dropping their stock price.
There have been several cases of firms being found guilty of falsifying financial accounts. Satyam Computers is the best example (which you may already know).
3. Would you be willing to spend Rs 1,000 for a litre of milk?
Isn’t that ridiculous? However, in the stock market, this is a common circumstance.
Most consumers overpay for a hot stock and lose money when the store loses its lustre. Many companies trade at a far greater value than their Price to Earnings (PE) ratio, even when they are not growing reasonably. Overpaying for premium equities is an unfortunate reality of the stock market.
In any case, why do individuals overpay for stocks? Only when you don’t know the exact price of a one-litre packet of milk will you be willing to spend Rs 1,000 for it, right? Investors in the stock market are in the same boat. They acquire stocks without conducting any research and hence wind up paying too much for them.
“In the stock market, there are people who know the price of everything but the value of nothing.” Fisher, Philip
4. In the stock market, almost 90% of people lose money.
The ugly truth about the stock market is this. The stock market is not profitable for everyone. Almost 90% of people lose money in the stock market.
This isn’t because the market doesn’t treat everyone equally. This is because most people are unwilling to put forth any effort or time. When choosing between A) researching a firm and investing wisely or B) investing in a rumoured multi-bagger stock advised by a friend, most consumers will go for the latter.
5. The ‘herd mentality ruins everything.’
An investor’s natural impulse is to follow the herd, which means they may not appear to have a sensible stance on a particular investment. Still, it is more likely to depart from the herd’s path — this phenomenon is known as “Herd Mentality.”
Nonetheless, stock investors are never rewarded for their efforts. Many of the worst stock market catastrophes, such as the dot-com boom during the 2008 economic recession, may be traced back to the same human tendency: HERD MENTALITY.
6. Nobody knows what the future holds.
I repeat, no one knows the future—the unpleasant but true reality of the stock market.
Top-tier analysts who are constantly guessing whether the economy is expanding or contracting will ‘fail’ to predict the same if a crisis comparable to 2008 (when the stock market fell by more than 60%) occurs again.
Advisers give financial advice based on the information available and their own experience. You are deluded if you expect them to foresee the future, and if they do, they are deceived. Prepare to see many surprising things when you enter the stock market. Nobody can predict the future.
“In the business world, the rearview mirror is always clearer than the windshield,” Warren Buffett famously said.
On Trade Brains News, you can now get the newest stock market news, and you can utilise our Trade Brains Portal to perform fundamental analysis on your favourite stocks.
The investors never come to the company and are unfamiliar with the situation on the ground. The company’s performance is occasionally poor, which is only known by the company’s working employees. The stock market is rigged in favour of big corporations, at the expense of ordinary people. Being an investor does not always require having a herd mentality. Apart from the business motivation, additional factors should be considered.