Warren Buffet rule: Never lose your money in the stock market


This article highlights the importance of avoiding losses in the stock market for long term or short term investment. An example will give you an idea of how disastrous it is for you to stick to a single stock for the long term after a huge loss.

A stock market is a place where stocks of various companies are sold and bought. The investment in the stock market are subjected to risk but at the same time gives high return compared to the conventional investment options like fixed deposit, PPF or any savings scheme in the bank. A stock market is a place where a person with the right kind of stock knowledge makes money. The income generated by the stock market is called passive income. Thus, everyone should have finance knowledge in order to grow the money.

If you are a novice investor in the stock market, you have to be careful while selecting the right kind of stock, at the right time and at the right price. In the stock market, you can invest your hard-earned money for a day or for years. The shorter is the span of the investment, the lower will be the return. The normal tendency of any stock investor is to buy low and sell high. This is the most common strategy.

What is the meaning of return in the stock market?

If a person bought 100 shares of ABC company's share at Rs. 100 before 6 months with Rs. 10,000. Today the price of the share is Rs. 120. Thus, the person has now Rs. 12000. Thus he got Rs. 2000 (12000-10000) return on 10000 amount investment i.e.20 % return. So, in six months, a 20 % return on investment is the best thing.

Positive return:

If a person gains money by investing in shares, the return is called a positive return. In the above example, a person got a 20% return at the end of six months.

Negative return:

If a share price falls and money lost is termed as a negative return. Warren Buffet (renowned investor of the world) advises one thing - "Never lose your money". What does this mean? He says that one should be very careful at selecting stocks. Once the stock falls to a certain level, it is very difficult to regain the amount lost.

For example, the previous case: If the stock price of the ABC falls to 80 Rs, he lost his 20 % amount as a negative return. If he wants to regain his lost principal amount he has to wait till he gets a 25% return from Rs. 80. That means if you lose money and you are waiting for the recovery, you need to wait for more.

Warren Buffet-Never lose yourmoney-stop-loss-stock-market

Another case - if that stock falls to Rs. 50 from Rs. 100, he lost 50 % amount and from the Rs. 50 level he has to get another Rs. 50 to get Rs. 100 price. He needs to wait until the amount becomes double in order to just get the money back. To get money back from the lower level. In the stock market, there is a big uncertainty of whether the stock will double or not in a given time period. Thus, Warren Buffet says, never lose your money.

Then what's the solution? Use the STOP LOSS. It is a price below the buying price. It will help to prevent further loss in the share. Once the stock falls to the stop loss level, you should sell the shares otherwise you need to wait till the stock rises to your buying price and then wait for the uptrend move. Normally stop loss should be placed at -5% return in order to safeguard the remaining principal. You can then switch the share and get the return. If you are long term investor, you can average the price

Conclusion

In a nutshell, if you are an investor in the stock market, think twice before making the buying decision of a given stock. You must have an exit price or stop loss in your mind before you invest in a particular stock. Always exit the stock when you obtain the positive returns as per your expectations.


Comments

Author: Umesh17 Feb 2020 Member Level: Platinum   Points : 12

A nice article to alert us while dealing with the share market investments. Share market is a place where a lot of speculation goes on and a new person might lose his money very fast by the time he understands the nitty-gritty of the system. The reason is very simple that the share market is prone to fluctuations and it is difficult to predict even for a seasoned player to guess the ways of the market in the coming times. There are still some observations which can be kept in mind while making an investment in this high-risk area.

First is the identification of the scrips which means that only the top companies which are sometimes called the blue chips are to be considered for investment and one should not put all his money in one of them but some money in many of them. This is very necessary because if some of those company fail in the long run at least one can get compensated by the others. The second important thing is to stay invested for the long term and do not go for the short term temptations. That short term thing is for the shrewd and wealthy traders to do so like day trading or stop-loss trading. Historically, it is seen that some of the blue-chip companies give a very handsome return in terms of dividend, bonus shares, rights shares and market appreciation and if one can hold them for long it will eventually turn out as a fortune. The third thing is this area requires a bit of study also about the companies where one is investing and what was their past performance. The last point is the Govt policies and changing business scenarios in which many companies who are able to change flourish but many others which are not able to cope up would perish also. So caution is the name of share market investment and there are no easy methods to make money there.



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