There is no denying the fact that today in the investment field, especially when it comes to investing in the stock market; we have more novice investors than the informed investors. This is the reason a lot of investors have continued to loose money in equities even when the market is supposed to be in their favor. This is because many don’t know when to enter and when to exit the market. These sets of people lack the understanding of what is a bullish and bearish market. They don’t know whether the bull is about to give way for the bear or vice versa.
Any investor that buys into any stock before the bear sets in will definitely loose money. Here, I am talking about regulated markets like the Nigerian stock exchange. In the more advanced markets like the Nasdaq etc, this situation can be managed by a seasoned investor. So before investing in these developing markets, basic knowledge of how to avoid this scenario is very important, as it will guarantee wealth for the investor. Our focus for this discourse will be the developing markets like Nigeria, which has been described as one of the fastest growing markets in the world, which has equally offered high returns to investors, and equally put the novice investors into serious debts.
I will like to explain the terms “bull and bear” first, so that the uninformed will easily follow as proceed in this discourse. The “bull” generally refers to when there is a rally in the price of equities. This is when the price of stocks just keeps going up, whereas the “bear” is the opposite of the “bull”. This is a period of downward movement of the prices of equities. An informed investor that buys into equity at the inception of the “bulls” will definitely make good profits, and if the “bullish” run is very strong, the profit margin sometimes can be unimaginable. This has made some people think that investing in the stock market is “a get rich quick” programme. There is no denying the fact that a good pick on the floor of the exchange can make you rich overnight, but it is not always so. You can equally loose all your funds at the stock market.
When a novice investor sees or hears that people are making 300-500% of their invested funds during a market rally, which is very common, some will just think that this scenario will continue like this, some will now go and borrow to add up with the ones they have to invest, hoping to maximize profits. Unfortunately, many of these folks will enter when the market is at its peak, and will buy at very high price. At this point in time, the market will be ready to start moving down, either as a result of profit taking or because of one news or the other. This will lead to loss of invested funds to the young and uninformed investor that entered the market at the wrong time.
During the “bull” season, there are cases where too much funds will just be chasing few stocks, which will just keep pushing the prices of equities up, and this will make stocks without fundamentals to equally rally in price, but once the market begins the process of correcting itself, which normally occurs during the “bear” season, the whole prices will come back to where they belong, and those who invested without knowledge will be worse hit. This type of loss is an avoidable loss which any knowledgeable investor can easily avoid, because he knows where to put his money, and when to exit the market, but the uninformed, who is just following the herd will have his fingers burnt, and instead of multiplying wealth in the stock market, he will loose the little that his has. This is not supposed to be so.