7 ways to lose money in stocks

Hello Riters, Hope you are doing great. We are back to help you do the personal finance. Today lets take you through some don’ts of a Investor. Lets discuss 7 ways to lose money in stock market and how to avoid them.

As Benjamin Graham, once said, “In the short run, the market is like a voting machine. But in the long run, the market is like a weighing machine.”

Read more on Investing –

*Mistakes to avoid while Investing

*5 To Dos of Investing

*What is a Stock Market Bubble?

*How to earn more money, Hustle?

Happy Reading 🙂 Come back for more, follow us on Instagram for Financial News @ritefinance

Bubble, oh no!

Time for some practical: Pour a cup of dish soap into 6 cups of water & stir it well. That is how Bubbles are formed, now you burst it!

Oh no!, not the Bubble Minku loves. Lets do it again.

Increase the price of an asset significantly surpassing way beyond its true value, and make the majority believe the price will continue to rise at least in the foreseeable future. There you go, that is exactly how Financial Bubbles are formed. Eventually the reality kicks in, and like every bubble it bursts!

Welcome to riteFinance, this is your host SalRite, With some saying the current Stock Market is in Bubble, today lets discuss about Financial Bubbles.

As per the legendary Investor Warren Buffet, Bubbles form when “People see neighbors ‘dumber than they are’ getting rich“.

Financial or Economic Bubble is not a new thing, in fact the official history of the first ever recorded Bubble dates back to as far as mid 1630s, though the term itself was coined around the 1720 AD. To dig a bit deeper, lets understand the five stages of an Economic Bubble with the example of what is known as ‘Tulip Mania’ of mid 1630s.

Stage 1 – Tulip comes to Vienna from Turkey, are soon distributed to Netherlands and becomes a status symbol in Dutch community. With a saturated intense petal color that no other plant had, and a profusion of varieties, Tulip soon becomes a coveted luxury item, increasing its asset value. This stage is referred to as ‘Substitution‘.

Stage 2 – This is when the news of Tulips start spreading, and becomes a topic among the majority . It is now that the Speculative purchases happen, and the bets are placed on the future value. As the flowers grew in popularity, professional growers paid higher and higher prices. Buy now, sell later at a higher price becomes the motive for Investors. This is referred to as ‘TakeOff

Stage 3 – Exuberance – a state of unsustainable euphoria. This is when the asset overshoot its intrinsic value leading to a jump in the portfolio of several. A few lucky/rational Investors sell at this stage, while the majority continue to buy in. At this stage Tulip becomes over-valued. At its peak, value one Tulip bulb was equivalent to a House. By around 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings, and cheese. Tulip mania reached its peak during the winter of 1636–37, when some bulbs were reportedly changing hands ten times in a day on paper (it is the time when future markets appeared in Dutch Communities).

Stage 4 – Critical stage – a state where some begin to sell. When the market realizes that an asset is over leveraged and way too over valued, some begin to lose faith and starts selling. This is when they realize there aren’t enough buyers. For Tulip it was the revelation of their true value. In around February of 1637, for the first time in a routine auction no buyers were available for the Tulips. This time coincides with the outbreak of Bubonic Plague in some European Cities. This lead to the 5th and last stage of a Bubble.

Stage 5 – Crash (pop) – Burst of the bubble, and the reset for the economy. In case of Tulip, Bubonic plague probably acted as a needle that led to the demise of its Market. With no buyers available sellers were left with nothing but a flower.

A few hundreds years later, now a Tulip is worth a few bucks and can be ordered online, but nevertheless bubbles keep forming and keep popping. As we humans are irrational beings. This leads to another story, this one more recent.

2008 Housing Bubble

This was the result of irrationality of the masses combined with financial engineering of the elite few, the Bankers. Lots of Subprime loans were made between 2004 to 2006 rising from 8% to around 20% in the United States, at the same time NINJA loans (No Income, No Jobs, and No Assets) grow in popularity and many of the Millennial with lesser Income would write a higher figure in the application, that no one in Banks would verify and they will easily sanction a loan. The greed of the Bankers didn’t stop here they combined all the A, B and C rated loans packaged them into something called CDOs (Collateralized Debt Obligation – a type of structured asset-backed security that include mortgages, loans or bonds), and sold it to the Investment Banks, betting further on loans. As if this wasn’t enough the CDOs were swapped for Insurance what is called as Credit Default Swaps. CDS acted as a financial instrument that could hide these risky investments (to read more on CDOs or CDS click here) Even the rating Agencies like S&P didn’t downgrade the bonds & kept ratings high. Couple this all with Inadequate regulations by the policy makers, and you see a Huge Economic Bubble.

Eventually, the home owners defaulted on their payment, this meant the riskier loans, CDOs hold by Investment Banks all lost their values, and suddenly the whole Financial system collapsed on its weight. Lehman Brothers the fourth largest investment bank in US back then filed for bankruptcy. And the Market corrected itself, not exactly though, the fed came in, and bailed us out. Enforcing strict regulations, and making much required policy changes combined with Quantitative easing kept the US Economy on its track.

Even before 2008 crisis, which is the most recent one (prior to this pandemic) there were several Economic Bubbles. One such was the dot com bubble of 2000, caused by excessive speculation in Internet-related companies. While several big companies like pets.com went out of Business, it was not the end for all, with growth in the technology sector stabilized a few like Amazon.com, eBay saw rise in their Market Share following the crash.

Another Bubble that can be looked at, dates back to 1840s Great Britain. Referred to as Railway Mania, this was the period when the shares of Railway Companies soared in their value, only to be declined later. Following the crash, the larger railway companies such as the Great Western Railway and the nascent Midland began to buy up strategic failed lines at a discounted price to expand their network. So what was the down fall of some, became an Opportunity for others.

Bubbles are primarily of two types –

  1. Equity Based – characterized by easy liquidity, tangible and real assets like tulip mania, railway mania and dot-com bubble.
  2. Debt Based – characterized by intangible or credit based investments with little ability to satisfy growing demand in a non-existent market like United States Housing Bubble (of 2008).

Can we predict these bubbles?

Well, we may not be able to predict accurately nevertheless we can identify it, based on the over leveraged asset price, high risk lending or borrowing practices, and when the people tend to rationalize borrowing, lending and purchase decisions based on expected future price rather than the ability to repay.

What can we learn?

There are few things that these Bubbles teach us –

  1. In every crisis lies an Opportunity, only if one knows how to capitalize on it.
  2. Bubbles are natural, every Economy goes from a Boom & Bust Cycle.
  3. Certain theoretical research models states that bubbles (as long as they do not burst), raise economic efficiency and welfare.
  4. Regulations have a big role to play in an Efficient Market.

If you want to read more about how the Bubbles work, there is a great article you can refer here.

Thanks for Reading, Lets us know what you think about the current Stock Market scenario in the comments below? Do follow us for more @ritefinance

Worth of Money

For those who came here to read how to earn/double your money than this not the blog post for you (you may like to check other posts on our site). In our Sunday edition, lets discuss ‘Is Money worth it?What is the real cost of earning Money?

Welcome Guys, I hope you are doing well, safe and sound from this ongoing pandemic, Happy & Healthy both physically and mentally. Today let’s take a step back and think about Money. Earning Money comes with a cost. A cost which is paid either in terms of efforts or time or both. And sometimes we end up spending way too much than the return we get. Well there is no way or a formula to equate things, like Money = Effort + Time – Stupidity or something similar, but what we all can see around is the consequences. It is very well true that a life without Money is a life full of Misery and Suffering, at the same time it is true that a life with Money and no intangibles like Happiness, Mental Peace is not worth it. Sometimes we get trapped in this vicious cycle of show-offs that we not just end up making unnecessary expenditure and destroying our wealth but also the more precious the ultimate gift of nature ‘Our Health’.

It is rightly said our body is a temple, and taking care of it should be our first priority even before growing income or building wealth. Moreover if you lack Mental Peace, no amount in this World be it a Trillion dollar can compensate for it. You may very well argue that at least Money can buy better things, comfort even if you are not fortunate enough to walk, it can get you a remote controlled wheel chair or maybe a personal assistant to help ease the pain, I agree that argument is valid! “Better be a Rich cripple than a Poor, but at the same time remember not to let Money cripple your Happiness or Peace!” Don’t let Money make you the unfortunate one to be alone like ‘Scrooge’, the character from 1843 famous novel A Christmas Carol (an interesting read, if you haven’t read that, i recommend you to do so). Don’t forget to check on your loved ones, and have some time out here & there. Take out some time to spend with your family, and enjoy out in Nature doing things that doesn’t require any Money. A life full of experiences at the end is more fulfilling than the one filled only with bundles of Cash.

Yoga
Yoga

That said, the point I am trying to make is not to discourage you to Earn less or pick up that easy Job; because remember it is better to suffer as a Rich than a Poor, but at the same time don’t forget Money is to make life easy, Wealth is for the financial freedom and the ability to buy things that in terms make you Happy not to pile up the cash later to spend it healing yourself from a depression or a disease which can be avoided at the first place by taking out time to connect with your body, mind and spirit. One thing I highly recommend is taking out time everyday to do Yoga, an ancient Indian Practice that keeps you healthy and helps connect your Mind, Body and Spirit.

I hope this blog post helped you realize the importance of being fit and stay focused, so that you can enjoy all the fruits of your efforts!

For future Financial tips and be on track to Financial Freedom do follow us @ritefinance. Your Support is the Intangible, single important dose of Happiness is all we need. Thank you

The Initial step to Freedom

Everybody wants to be financially free, but a few knows the way and a very few actually puts in the effort.

Welcome to riteFinance – the pathway to Financial Freedom! Today we will discuss how to create wealth.

The very first step to wealth creation is to know your spending aka track your expenses. To track your expenses you can use a simple excel sheet or a more suitable tool like mint. Whatever you choose the process is very simple, you need to list down all your expenses from day 1 of every month to the last day. And you need to do this for at least 3 months to get an average. If this Average is more than 100% of your Income, then you need to either A. Cut down your expenses, or B. Increase your Income, though an Increase is always advisable but cutting down the expenses is the first thing you should do. Remember ‘Live below your means’, buy only what you can afford not what your credit card can afford.

Once we know how much we spend, the next step is to create an Emergency Fund, i.e. set aside 3 to 6 months (6 recommended) of cash reserved, only to be used for Emergency. If you need to know more about the same, we already have blogged regarding the same here.

Now, if you have the above two steps taken. The next question is ‘How to create Wealth?‘. Yes, we haven’t yet discussed that. The above steps won’t help you create wealth, but it will give enough peace to progress towards Financial Freedom.

To begin your journey, you must know how much of the Income is your expenditure (again if your expenditure is more than or equal 100% we urge you to increase income or cut the expenses). Calculate %Expense of Income, for example if your Income is 100 INR
(or for that matter any currency), and your expense is 75 INR than it becomes 75%.

One thumb rule to manage your Finances especially if you are beginner is to follow 75-15-10 rule i.e. Spend 75% of your Income, Invest 15% and Save 10%. Later on as you get better grasp of your finances and is able to cut more on expenses / increase your income then one should progress to 50-30-20 Rule, 50-30-20 rule can also be called as the Ultimate lifetime Money Plan. It simply means one should Spend 50% of the Income, Invest 30% and save the remaining 20%. And in case your expenses are less than 50%, great you can invest the remaining. You can read more on Investing here.

Remember the you need to Invest like crazy to be Wealthy, while if you Spend like crazy you just end up looking Rich. Choice is Yours.

Tip – Donate a small amount from your earnings to a Charity, and you will start feeling Abundance & Positivity surrounds you, fueling in more wealth and adding a sense of purpose to your life. The more you give the more you will be in a position to receive. Give it a try!

Thank you for reading. For more such Financial Tips, do follow us @ritefinance. Together let’s build Wealth. Happy Learning…