CERTIFICATE
1
This is to certify that Mr. Labeeb Yusuf, a bachelor of commerce student, worked on the
project titled “Why do retail traders lose money in the Stock Market? under Prof.
Somnath Banerjee’s supervision and direction at the Department of Commerce and
Management at St. Xavier’s University, Kolkata, India. To the best of our knowledge, the
work provided has never been done at another university or research institute.
(Signature with stamp).
Prof.
(Supervisor)
Department of Commerce and Management.
St. Xavier’s University, Kolkata
Kolkata - 700160, India
(Signature with stamp)
Dr. Somak Maitra
Department Of Commerce and Management
(Signature with stamp)
Bachelor of Management Studies
ACKNOWLEDGEMENT
I want to thank everyone who helped me finish my dissertation. I like to convey my gratitude
and genuine appreciation to the dean of our department, Dr Somak Maitra, and the project's
supervisor, Prof. Somnath Banerjee. I greatly thank Prof. Somnath Banerjee, my mentor and
supervisor at St. Xavier's University in Kolkata, for his unwavering support, direction, and
advice during the duration of the project's study and for the final compilation. The different
websites from which information was gathered have proven to be quite beneficial and
significant sources of information for my research.I also want to thank my parents and friends
for their invaluable assistance in making this effort successful.
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EXECUTIVE SUMMARY
This research paper investigates the causes of retail traders' losses in the stock market and
suggests strategies to alleviate these losses. The course provides a thorough grasp of the stock
market's operation, main regulatory organisations, and the role of stockbrokers. It also delves
into fundamental and technical analysis, trading techniques, and the difference between retail
and institutional traders.
Several major findings are highlighted in the study. First, retail traders frequently lack the
requisite market information and expertise, resulting in suboptimal decision-making. Fear and
greed, for example, play a key role in their trading operations, leading to impulsive and
unreasonable behaviour. Furthermore, retail traders usually disregard good risk management
practises, fail to follow well-defined trading strategies, and rely on suggestions without
completing extensive study.
To address these concerns, the article suggests ways for improving retail traders' trading
performance and lowering losses. These methods include boosting financial literacy and
education in order to improve traders' market knowledge and understanding. It emphasises
the necessity of risk management practises such as stop-loss orders and portfolio
diversification in order to protect capital. It is recommended that a well-defined trading
strategy be implemented, with clear entry and exit points and disciplined decision-making.
Furthermore, the study differentiates between retail and institutional traders, emphasising the
benefits institutional traders have in terms of resources and knowledge. Retail traders can
learn from institutional trading tactics and apply them to their own trading strategies.
This study's conclusions have consequences for both retail traders and market regulators.
Retail traders can profit from the recommended solutions by creating a solid basis of market
knowledge, implementing risk management measures, and implementing disciplined trading
strategies. Market authorities, such as India's Securities and Exchange Board (SEBI), can
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improve investor safety by emphasising financial literacy programmes and imposing stronger
controls on stockbrokers and trading platforms.
Retail traders can enhance their trading performance, minimise losses, and boost their
chances of success in the volatile and demanding stock market environment by implementing
these solutions and addressing the recognised reasons for losing money in the stock market
INTRODUCTION
Background Study
The stock market attracts a varied spectrum of participants, including retail traders who buy
and sell assets in order to profit. However, it is generally documented that a large number of
retail traders lose money in the stock market. The purpose of this background study is to
investigate the causes of these losses and provide light on how and why retail traders lose
money in the stock market. Understanding these aspects is critical for establishing effective
risk-mitigation methods and improving retail investors' trading success.
Lack of Knowledge and comprehension: A lack of knowledge and comprehension of how
the stock market works is one of the key reasons retail traders lose money in it. Many traders
join the market without a firm understanding of fundamental and technical analysis, market
trends, and risk management measures. This information gap exposes individuals to more risk
and raises the possibility that they will make poor investing selections.
Emotional Decision-Making: Emotions play an important part in retail traders' decisionmaking processes, frequently resulting in poor outcomes. Fear and greed are common
emotions that can distort judgement and lead to rash behaviour. Fear of missing out (FOMO)
may cause traders to join trades without performing extensive research, whereas greed may
cause traders to hang onto lost positions in the expectation of a turnaround. Overtrading,
chasing trends, and neglecting to reduce losses can all come from emotional decision-making,
all of which add to financial losses.
Lack of Risk Management Practises: Effective risk management is critical in the stock market
for minimising losses and conserving money. Retail traders that fail to follow adequate risk
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management practises are more likely to suffer significant losses. This includes failing to set
stop-loss orders, failing to diversify their portfolios, and allocating an excessive amount of
capital to high-risk trades. Traders are subject to market volatility and rapid price variations
in the absence of risk management methods.
Inadequate Trading Strategy: Successful trading necessitates a well-defined strategy that
includes clear entry and exit points, risk tolerance thresholds, and position sizing criteria.
Retail traders frequently lack an organised approach to their trading activity, instead
depending on gut instinct or rumour. Without a sound trading plan, traders may make rash
and inconsistent decisions, resulting in poor trading results and financial losses.
Tips and Recommendations Without full Research: Retail traders frequently rely on tips and
recommendations from sources such as social media, forums, or friends without completing
full research or due diligence. Following these advice blindly, which may be lacking in
legitimacy or based on biassed or insufficient information, might lead to poor trading
judgements. Such dependence on outside counsel without independent analysis raises the
danger of loss.
Understanding the factors that contribute to retail traders' financial losses in the stock market
is critical for developing risk-mitigation measures and instructional programmes. Lack of
knowledge and comprehension, emotional decision-making, insufficient risk management
practises, the absence of a well-defined trading strategy, and following suggestions without
prior study are all factors that contribute to the difficulties faced by retail traders. By
addressing these variables and fostering financial literacy, risk management, and disciplined
trading practises, retail traders can be empowered to make better informed decisions, reduce
losses, and enhance their overall stock market trading performance.
Conceptual Framework
This term paper's conceptual framework intends to provide a systematic explanation of the
elements that influence retail traders' losses in the stock market. The framework encompasses
many variables that contribute to these losses, highlighting their interdependence and
linkages. This conceptual framework guides the analysis and interpretation of research
findings, as well as the formulation of successful solutions.
Market Knowledge and comprehension: Comprehensive market knowledge and
comprehension are the foundations of effective stock market trading. This includes having a
working knowledge of market dynamics, trading techniques, and financial instruments. A
lack of knowledge and awareness increases the possibility of making poor investing decisions
and exposes traders to greater risks, which can result in financial losses.
Emotional elements and Behavioural Biases: Emotional elements such as fear, greed, and
overconfidence have a substantial impact on the decision-making processes of retail traders.
These emotions can lead to rash decisions, such as following trends, hanging on to lost
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positions, and ignoring risk management practises. Behavioural biases, such as loss aversion
and confirmation bias, influence decision-making even more, frequently resulting in poor
results and financial losses.
Risk Management Practises: Effective risk management is crucial for retail traders in
limiting losses. Setting adequate stop-loss orders, diversifying portfolios, and allocating
capital wisely are all risk management practises. Traders are exposed to excessive risk when
adequate risk management measures are not implemented, raising the possibility of severe
losses.
Trading Strategies and tactics: Retail traders' trading strategies and tactics have a substantial
impact on their stock market success. This includes using fundamental and technical analysis
tools to find investing opportunities, decide entry and exit points, and efficiently manage
positions. Poor trading results and financial losses can be exacerbated by a lack of a welldefined trading strategy or the employment of inefficient approaches.
Information Sources and Market Manipulation: When making trading decisions, retail
traders frequently rely on numerous information sources such as news, social media, and
recommendations. Misinformation or market manipulation, on the other hand, can lead to
erroneous decision-making, resulting in losses. It is critical to understand the authenticity and
dependability of information sources in order to make informed trading selections.
Market Volatility and External Factors: Economic conditions, geopolitical events, and
regulatory changes all have an impact on the stock market. Volatility in the market can have a
substantial impact on retail traders' positions, potentially resulting in losses. Understanding
and successfully navigating market volatility is critical for reducing risks and losses.
The conceptual framework emphasises the multifaceted and interwoven nature of factors
driving retail traders' stock market losses. By taking these factors into account, academics and
traders can obtain insights into the causes of these losses and develop techniques and
solutions to limit risks and improve trading performance. Retail traders can improve their
chances of success and minimise losses
LITREATURE REVIEW
Title: "Risk Management and Retail Trader Performance: An Empirical Analysis" Author:
Chen, X., Liu, Y., & Wang, Z. Date: 2019
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Chen, Liu, and Wang undertake an empirical study to investigate the association between risk
management practises and stock market performance of retail traders. The authors evaluate
the efficiency of risk management in decreasing trading losses by conducting a thorough
investigation of trading data and risk management tactics used by retail traders. Their
research sheds light on how good risk management measures, including as diversification and
the use of stop-loss orders, can reduce the likelihood and severity of financial losses among
retail traders.
Title: "Market Manipulation and Retail Trader Losses: Evidence from Case Studies" Author:
Anderson, R., Thompson, L., & Wilson, M. Date: 2021
Through a series of thorough case studies, Anderson, Thompson, and Wilson investigate the
impact of market manipulation in contributing to retail trader losses. Their study looks at
noteworthy examples of market manipulation, such as pump-and-dump scams and insider
trading, and analyses how they affect retail traders' investment outcomes. The authors provide
vital insights into the vulnerabilities faced by retail traders and the possibility for significant
losses as a result of manipulative practises by researching the strategies used by manipulators
and their effects on market prices.
Title: "The Impact of Information Asymmetry on Retail Trader Performance: A Longitudinal
Analysis" Author: Lee, J., Kim, S., & Park, H. Date: 2018
Lee, Kim, and Park undertake a longitudinal study to determine the impact of information
asymmetry on the stock market performance of retail traders. The authors study how
information asymmetry impacts retail traders' capacity to make informed investment
decisions by examining trading data and the availability of information to different market
players. The paper provides empirical evidence on the negative impact of information
asymmetry on retail trader performance, emphasising the difficulties that individual traders
experience in obtaining timely and reliable market information.
Title: "Technological Challenges and Retail Trader Losses: A Comparative Study" Author:
Martinez, G., Nguyen, T., & Patel, R. Date: 2022
Martinez, Nguyen, and Patel conduct a comparative study to investigate the technological
hurdles confronting retail traders and their relationship to financial losses. The authors
investigate the impact of technical improvements such as algorithmic trading and highfrequency trading on retail traders' trading outcomes. The study provides insights into the
dangers and benefits of technological adoption in the stock market by comparing the
performance of retail traders using technical tools to traditional approaches
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OBJECTIVES
1) To identify and examine the role of behavioural biases in retail trader losses in the stock
market
2) To assess the importance of risk management
3.) To mitigate the retail traders loss
RESEARCH METHODOLOGY
This term paper's research technique includes primary and secondary data collection methods
to get complete insights on why most merchants lose money in the stock market. Surveys
were used to collect primary data, while secondary data was gathered from existing literature,
reports, and case studies.
The survey used a quantitative approach to collect numerical data, allowing statistical
analysis and generalisation of conclusions.
The sample for the survey was chosen using a non-probability convenience sampling
technique.
Data Gathering:
a. Primary Data: To obtain data from participants, a standardised questionnaire was
constructed. To elicit quantitative and qualitative replies, the questionnaire included both
closed-ended and open-ended questions.
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Secondary data was gathered through a thorough assessment of current literature, reports, and
case studies on the stock market and trading. Secondary data was gathered through scholarly
databases, industry journals, credible web sources, and relevant government papers.
Data Examination:
a. Quantitative Data: The survey's quantitative data was evaluated using statistical tools. To
summarise the responses, descriptive data were produced.
b. Qualitative Data: Thematic analysis was used to analyse qualitative data gathered from
open-ended survey questions and secondary sources.
limits: It is vital to recognise several limits of the research methods, such as the use of
convenience sampling, which may limit the findings' generalizability.
Furthermore, when evaluating the results, the dependence on self-reported data should be
addressed.
CONTENTS
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Executive Summary
Introduction
Literature Review
Objectives
Research Methodology and Limitations
What is the Stock Market?
NSE, BSE, SEBI
The Stock Brokers
Fundamental Analysis
Technical Analysis
Procedure of Trading
Retail Traders
Institutional Traders
Why do Traders lose money?
Solutions
Data Analysis and Interpretation
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● Annexure
WHAT IS STOCK MARKET?
The stock market is a platform where the stocks are bought and sold. Investors pay a certain
amount to own a small share of the company. The company uses this capital to expand their
business, invest in other projects and fund their operations which helps the company to gain
more profit. Through these profits the companies provide dividends to their investors which
will induce them to buy more stocks.
The stock market often provides information about the health and growth of the economy.
When the stock market is performing well, it is a sign the investors are assured about the
economy's future. This assurance can lead to increased investment and spending which helps
encourage economic growth. On the other hand when the stock market is not performing well
it is a sign that the investors are sceptical about the economy's future. This scepticism can
lead to decreased investment and spending, which can slow down economic growth. Stock
market is a powerful and complex field which is influenced by a number of factors.
•The company's individual performance plays a major role in the stock market, such as their
management and employee turnover ratio. If the company's performance is poor then the
stock prices will likely decrease.
•Sentiment of the investor also plays an important role in the stock market, if an investor is
confident enough about the company then they are more likely to invest in it whereas if
they’re uncertain they will sell their shares.
The stock market can be a great money-making opportunity for those willing to take the risk.
As mentioned before, when an investor purchases a share of a company, they become a part
owner of that company. If the company’s performance is going well, the share value will also
increase; thus, when the investor sells these shares, they earn a profit. However, the stock
market has a fluctuating and unpredictable environment. The value of shares can fluctuate
rapidly, and investors can lose money.
At last, the stock market is a reflection of the economy.
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NSE, BSE, SEBI
BSE
The Bombay Stock Exchange Company is a Public Listed Company and is located in
Mumbai.It was founded in the year 1875.It’s founder was Shri Premchand Roychand who
was a successful businessman in the 19th century.The chairman of BSE is Vikramaajitsen
and the CEO is Ashish Kumar Chauhan.BSE is the oldest stock exchange company in Asia
and is ranked at the 10th position globally.The company introduced modern technology in the
year of 1995 after being inspired by NSE.BSE is registered with 5000 companies as the rules
and regulations is not strict and new and local companies can join as well.Their network is
available in 450 cities.BSE is suitable for long term investments as their daily turnover ratio
is 1000-5000 crore and their market capitalisation is 2.1 trillion US dollars.
NSE
The National Stock Exchange Company is a Private limited company and is located in
Mumbai.It was founded in the year 1992.Their chairman is Girish Chandra Chaturvedi and
CEO is Vikram Limaye.NSE is India’s first modernised stock exchange with fully automatic
electronic trading which made trading easier.NSE is registered with 2000 companies as the
rules and regulations are strict thus its difficult for local and new companies to join.Their
network is in 1969 cities.NSE is ranked at 11th position globally.NSE is more suitable for
short term investments as their daily turnover ratio is upto 30,000-50,000crore and market
capitalisation is 2.27 trillion US dollars.
SEBI
SEBI’s full form is Securities and Exchange Board of India.It was established in 1992.It
promotes a orderly and healthy development in the stock market.SEBI is needed as the
growth of dealing in stock market increased the malpractices and frauds also started to take
place and to prevent these practices the government of India set up an agency called
securities and exchange board of India (SEBI).The purpose of SEBI is to protect investors
and traders. It provides a marketplace in which they can finance fairly for issuers.Provides
accurate information and protection for investors.And provides a competitive intermediaries
professional market.The overall objective is to protect the interest of investors and promote
development of stock exchange.
THE STOCK BROKERS
If you want to engage in share market trading, it is done through the stock exchange. India
mainly has two stock agents: the Bombay Stock Exchange and National Stock Exchange. So
a stock broker is an individual company who buys and sells shares and stocks on behalf of
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their private clients in return for a commission. A company like Zerodha is a stock broking
company. Stock brokers directly deal with their clients and can also be financial advisers. A
stock broking company's duties are to offer investment advice to their clients. They are
obliged to help and inform their clients with their investment decisions.They perform trades
on behalf of their clients like buying and selling of shares.The stock broking company also
uphold all the transaction information and communication with their clients.These were just a
few examples of the duties of the stock broking company. There are three types of stock
broker in India:
•Full service-These stock broking company provides research on the stock market,financial
tips,RA, and offline branches with a high brokerage.
•Bank Based-These are the financial advisors who work for the bank and provide investment
services to customers.For example HDFC security and Axis bank.
•Discount Broker-These broking companies provides trading facilities with a lower brokerage
rate but without any facilities like RA,offline branches,financial tips etc.
A stock broking company offers a platform to the investors to buy and sell trades and other
financial instruments.There are few steps on how stock broking company works:
•Account opening-The investors open their trading accounts through the stock broking
company to buy and sell trades and stock.
•Research-The stock broking company research on different companies to recommend their
clients in which company to invest in.
•Trading-After a thorough research the company finally starts to trade on behalf of their client
by selling and buying trades and shares.
•Deal-The compare now settles all the trades on their client's behalf, ensuring all the trades
are delivered and payment is made to the investor.
•Reporting-The stock broking company reports regularly about all the transactions made to its
clients and delivers them with all the other necessary information.
•Payment-Now the stock broking company charges their fees or commission for the service
provided to their client on trade and other financial management.
There are many stock broking companies in India, one of the largest retail brokers is Zerodha.
So Zerodha is privately owned by its co-owners Nikhil Kamath and Nithin Kamath. It’s a
discount brokerage company that offers their customers financial services like online trading
and investment services. It is also known for its low-cost brokerage and an uncomplicated
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trading platform. Zerodha is known for its low-cost brokerage fee and flat fee discount,
attracting many users in the past few years.
FUNDAMENTAL ANALYSIS
This mode of analysis is often used by investors who want to evaluate the proper <intrinsic
value> of a stock or a script. Intrinsic Value refers to the worth of the stock according to its
financial model. Basically, fundamental analysis helps us to understand whether a stock is
undervalued, overvalued or fairly priced. Investors analyse whether a particular stock is
overvalued, undervalued or fairly priced with the help of the different financial models or the
economic reports of the stock; such as its balance sheet, return on investment reports, sales
report, cash flow statements and etc which can be easily found on the company’s website
itself or on the different websites i.e, Screener, Ticker Tape, Sensibull and etc. Each and
every company listed in the stock market has a particular industry to which it belongs. A
company's or a stock's financial health or value can easily be evaluated by comparing its
metrics with its industry's metrics i.e., the price per earning ratio(P/E), the earning per
share(EPS), the return on equity(ROE), and etc. An individual/investor can easily compare
both metrics with each other and speculate whether the company is eligible for investment or
not. For ex, if a company's P/E ratio is less than its industry's P/E ratio then it is supposed to
be undervalued and a prominent stock to do the investment, or let's say if a company's ROE is
positive from the past ten years and is above 15% then the particular company is good for
investment. Therefore, if a stock is undervalued then most probably its price will rise in
future to meet its perfect value which makes an undervalued stock a good instrument for
investment. With so many benefits fundamental analysis also comes with some limitations, as
it is only used for long-term investment which means a minimum tenure of 3-5 years, which
makes it almost impossible for an investor to predict short-term movements accurately.
Unexpected events, economic factors, elections in the country, natural calamities, pandemics
or any other unexpected events can become a reason for the wrong accuracy of fundamental
analysis. For example, in 2020 every stock with good fundamentals fell drastically because of
the covid-19 pandemic which was an unexpected disaster. If seen on the other side of the coin
then, the pandemic also brought an enormous amount of opportunities for investors as almost
every stock in the market got drastically corrected and became undervalued which provided
great opportunities for investors to invest in the stocks and generate a great amount of profit
from them. Hence, the fundamental analysis remains a great tool for investors having a longterm profit vision from the stock market.
TECHNICAL ANALYSIS
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This mode of analysis is often used by traders who trade stocks/scripts, commodities,
currencies and other financial instruments for a very short period of time, i.e., a day, week or
month. Technical analysis refers to analysing data through charts. It involves the study of
historical data and prices through chart reading, which comprises different chart patterns,
indicators, tools, graphs, etc. As the theory of technical analysis says that past chart patterns
and movements insights for future trends and patterns. The traders, therefore, plot the charts
such as support lines, resistance lines, trend lines or different patterns (flag and pole pattern,
symmetrical triangle) to identify the further movement of the stock and trade them to earn
profits. There are several indicators as well which are used by a vast number of traders to
speculate or predict the price of the stock, such as the relative strength index(RSI), MACD,
ATR, EMA, moving averages, etc. These indicators are also known as the lagging indicators
because they provide late information about the movement of the stock, which cages them to
act as a trend analysing tool. Almost every trader uses the Price Action method to predict or
speculate the movement of the stock. Basically, price action is a technique of trading which
involves a simple but the most effective support and resistance strategy with the help of
different chart patterns, support resistance lines and trendlines to read the market and take the
decisions of buying or selling a stock or any other financial instrument accordingly. It is also
called a "Holy Grail" system of trading as it helps to predict the future price and movement of
a particular financial instrument in a very simple yet effective way. Just like the fundamental
analysis, the technical analysis also comes with some limitations. For instance, the technical
analysis only focuses on the patterns and historical data neglecting the company's
fundamentals. Unexpected events, economic factors, elections in the country, natural
calamities, pandemics or any other unexpected events can become a reason for the wrong
accuracy of technical analysis. Hence, technical analysis is a very valuable tool for short-term
traders and can also be used by long-term traders or investors simultaneously with
fundamental analysis to get deeper insights into the market.
PROCEDURE OF TRADING
Trading in the stock market is basically buying and selling shares of publicly traded
companies. So basically investors buy shares in the expectation of an increase in the stock
price of the company to sell these shares to gain a profit. Contrarily investors may also sell
their shares if they expect a decrease in the value of the share. Trading can be done in many
ways, through a brokerage firm, online trading platforms, direct investing etc. The investors
can hold these shares for a long term or a short period of time depending upon their trading
strategy. To trade in the stock market an individual needs to follow steps to be a successful
trader i.e the basics of the trading concept should be clear, learn about the multiple strategies
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and backtest these strategies to understand which strategy has been more profitable for them
and after picking the strategy the individual should start demo trading to get a clearer concept
and start live trading in the stock market.
Mainly there are two types of trading which are used while trading i.e long term and short
term.
• Long-term trading-A Long-term trading is a strategy in which the investors buy and hold
the shares of a company for a longer period of time, typically for several years or more. It is
the safest way of trading. The investor's aim is to gain from the growth of the company
during this period and get regular returns or dividends from the company.
• Short-term trading-A Short-term trading is a strategy in which the investors buy and hold
the shares of a company quickly, most probably within a few days or a week. It’s a risky way
of trading. As in short-term trading the investors take advantage of short-term fluctuations in
the market, these investors buy stocks when they’re undervalued and sell them when their
value increases and thus generate a profit for themselves.
There are also different kinds of strategies of trading which consist of:
•Trend Following- It is a kind of strategy where one buys the shares when their value goes up
and sell it when its trend goes down. In this type of strategy, the investor is not going to have
more than 40% winning accuracy. Basically, traders buy and sell the shares according to the
trends in the stock market.
•Scalping-It is the kind of strategy where the trader buys multiple trades in a day to make
small amounts of profit. Their goal is to make small profits with each trade. The winning
accuracy can lie between 70-90% in scalpers.
These were just a few examples of many trading strategies. A trader must choose the strategy
wisely which suits their goals, trading style and risk-taking.
So after learning about the strategies of training the investor need to back-test these
strategies. Back test simply means a way to test a trading strategy utilising the market data
available of the past few months or years and to see how it would’ve performed back then.
Backtesting will not only help in identifying the strengths and weaknesses of an individual’s
trading strategy but also improve your skills before they start live trading. While backtesting
also keep in mind to keep realistic assumptions and to get a precise picture of how the
strategy would perform in the real world.
After back testing all the strategies the investor picks one of the strategies to trade which suits
their goals, style and how much risk they are willing to take.As different strategies are made
to fit in different market conditions. Picking up the right strategy is an important step and can
be crucial as it will increase their chance of success and growth in trading.
Once the trader has learned the basics and picked up their strategy they can now start to demo
trade. Demo trading is practising without risking any real money before starting live trading.
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The traders use a platform where they can experience trading without any risks and practice
and gain more knowledge about trading before they start taking risks. Demo trading helps in
getting more insights into the different strategies. This method can also be used by
experienced traders who are looking forward to practising other kinds of strategies without
any fear of losing money. Demo trading provides real-time data and risk management
experience.
Ultimately once a trader is all set to trade, they make a trading account. A trading account is
opened through a broker who offers trading services, for example, Zerodha and Upstox
provide these services. Once you choose the broker you follow their steps to open a trading
account. These require giving your personal information like your name, phone number,
address and financial information. Once your account is set up you can start live trading with
your chosen strategies, trading plan and reviewing the plan to gain in the stock market.
RETAIL TRADERS
Retail traders, also known as individual or small traders, are individuals who participate in
the financial markets by trading stocks, commodities, currencies, or other securities for their
own personal accounts. They differ from institutional traders, such as hedge funds or
investment banks, who trade on behalf of larger organisations or clients.
Retail traders have become increasingly prevalent in recent years due to advancements in
technology, access to online trading platforms, and the democratisation of financial markets.
They typically trade with their own capital, aiming to profit from short-term price movements
or longer-term investment opportunities.
One of the key characteristics of retail traders is that they often have limited resources and
smaller trading capital compared to institutional traders. However, the rise of online
brokerage platforms has made it easier for retail traders to enter the market with lower
transaction costs and reduced barriers to entry. This has allowed individuals with varying
levels of financial means to participate in trading activities.
Retail traders engage in various trading strategies depending on their risk appetite and
investment objectives. Some retail traders focus on day trading, where positions are opened
and closed within the same trading day, aiming to take advantage of short-term price
fluctuations. Others prefer swing trading, holding positions for a few days to weeks, or
position trading, where positions are held for several weeks to months.
Retail Traders may analyse financial statements, economic indicators, news events, and
technical charts to identify potential trading opportunities. Additionally, they may follow
social media platforms or online forums to gather information and gauge market sentiment.
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While retail traders have the potential to generate profits from trading, it is important to note
that trading involves inherent risks. The financial markets can be highly volatile, and prices
can fluctuate rapidly, potentially resulting in substantial losses. Retail traders must manage
their risk effectively, set stop-loss orders to limit potential losses and exercise discipline in
their trading strategies.
Retail traders also face challenges such as information asymmetry and the influence of more
significant market participants. Institutional traders with access to extensive resources and
research may have an advantage over retail traders. Additionally, market manipulation and
high-frequency trading can impact the trading environment for retail participants.
Despite these challenges, retail traders play an important role in the financial markets. They
contribute to market liquidity and provide diversity in trading activity. Furthermore, the
collective actions of retail traders, such as through online communities or social media
platforms, have gained attention in recent years as they can have an impact on market
sentiment and specific stocks or sectors.
Overall, retail traders are individuals who participate in the financial markets with their own
capital, aiming to profit from trading opportunities. While they face challenges,
advancements in technology and access to information have empowered retail traders,
enabling them to engage in trading activities and potentially generate returns in the dynamic
and ever-evolving financial markets.
INSTITUTIONAL TRADERS
Institutional Traders, also known as the biggies or the market's key players, trade on behalf of
banks, hedge funds and huge organisations. These traders have a massive amount of capital
and portfolios compared to retail traders. They mostly use fundamental analysis for their
long-term and ultra-long-term trades. Their trading volumes often influence the market prices
as they trade with enormous liquidity and capital. Some of the prominent institutional traders
are. Lt. Rakesh Jhunjhunwala, Sanjiv Bhasin, Vijay Kedia and Ramdeo Agarwal.
Institutional Traders' actions may have a massive impact on the total market dynamics.
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WHY DO TRADERS LOSE MONEY IN THE MARKET?
According to the research, approx. 90-95% of retail traders lose money in the stock market.
NO, the market is neither rigged, nor controlled by a particular Insititute, it's just the retail
traders who make mistakes and blame the markets for their loss. The major reasons for their
losses are Psychology, Lack of knowledge, Greed, Emotions and Patience.
1.) Psychology - One of the biggest reasons retail traders lose money is their trading
psychology. Most of them enter the market to make "Quick Money." They forget that the
stock market is just like other serious businesses, where one should invest time and effort
before investing money. Proper trading psychology comprises trading plan, greed, emotions
and patience, etc. Here, we are going to talk about the trading plan. Almost every
unsuccessful trader has a common problem of not trading according to their plan. For x., a
trader makes a strategy to buy 50 qty of XYZ stock (currently trading at Rs 100 per share) at
Rs. 95 with a stop loss of Rs.90 if it makes a particular pattern. But, due to FOMO (fear of
missing out the opportunity), he thinks that the stock will not come down to the price he has
planned to purchase and straightaway buys it @ Rs 100 which is much higher than the price
he planned to purchase the stock. What happens next?, the price does come down to Rs. 95
and bounces back to the target price from which he would have gained profit but in spite of
being patient the trader cuts down his trade and book a loss in it. So, to become a profitable
trader one should have a proper trading psychology and trade according to the plan because
almost every strategy works in the stock market it's just the psychology on which one should
focus on.
2.) Lack of knowledge - Another major reason retail traders lose money is lack of knowledge.
With the mindset of making quick money from the market, most people just jump into trading
without learning and taking proper education about it. However, they end up making big
losses in the market as trading should be treated as a serious business instead of treating it as
a way to make quick money.
3.) Greed, Emotions and Patience - Out of the majority, some handful of traders do study and
learn well about the markets and trading before jumping into it, but still end up making
losses. That's because of greed, emotions, fear and lack of patience. There is a saying that a
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trader should be emotionless and trade like a robot, and then only he/she will be able to
become profitable in trading. As trading is a game of probability, one should never focus on
quitting losses but to win more trades so that he/she ends up making profits.
SOLUTIONS
Trading is not easy but surely a simple business to learn and execute. One should treat trading
as a serious business and learn well before getting into it. After getting the proper knowledge,
one should prepare a proper strategy and backtest it with the historical data to see whether the
strategy is profitable or not. If the particular strategy even has a 50% winning probability
which means in total 10 trades even if it gives 5 profits and 5 losses then it is perfect, as
mentioned above, almost every strategy works in the market. It's just the psychology which
affects the profitability. After setting up the system one should always keep in mind that
he/she is supposed to trade emotionless and according to the plan no matter whether it gives
profit or loss on that particular day. There's a saying "Plan the trade and Trade the plan
emotionlessly", which means a trader should never be fearful or lack patience and go against
his/her trading plan because of greed of earning more profit or because of the FOMO. A
trader should never forget two points, first that the market gives immense amounts of
opportunities to the traders and second, losses are part of the game, learn to cut the losses
early and keep profits for long. A simple way to end up being profitable in trading no matter
what strategy a trader uses is by following the 1:2 ratio technique, which means one should
not lose more than 1% of the capital in a single trade and never book profit below 2% of the
capital. For instance, if a person trades with the strategy which has 50% winning probability
can also end up being profitable by using the 1:2 ratio technique. Suppose a trader trades with
a capital of Rs. 10,000 with a winning percentage of 50% out of 10 trades( 5 profits and 5
losses ) however by using the 1:2 ratio technique he will end up making Rs. 5000, as he lost
only Rs 1000/trade on his 5 losing days and earned Rs. 2000/trade on his 5 winning days
which results (10,000 - 5000) to a profit of Rs. 5000.
Anyone can become a professional trader by being disciplined, following the plan and break
the myth that the stock market is a gamble and everything is rigged in it.
DATA ANALYSIS AND INTERPRETATION
Based on the responses from the questionnaire, here is the data analysis and findings for your
research paper on why and how retail traders lose money in the stock market:
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Demographic Analysis:
Gender:
The majority of respondents (80.3%) identified as male, while 10.7% identified as female.
Figure 1.0
Age: The majority of respondents (96.1%) fell within the age range of 18-28, indicating a
younger demographic.
Figure 1.1
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Educational Background:
The highest proportion of respondents (56.3%) held a Bachelor's degree, followed by 35.9%
with a Master's degree.
Figure 1.2
Employment Status:
A significant percentage of respondents (56.3%) identified as students, indicating that they
may engage in stock market trading alongside their studies.
Figure 1.3
Trading Experience and Behavior:
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Experience:
The majority of respondents (56.3%) had been involved in stock market trading for less than
a year, indicating a relatively inexperienced cohort.
Trading Frequency: The most common trading frequency among respondents was weekly
(55.3%), followed by daily (35.9%).
Figure 1.4
Financial Losses:
An overwhelming majority of respondents (94.2%) reported experiencing financial losses in
their stock market trading.
Figure 1.5
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Factors Contributing to Losses:
Lack of Knowledge and Understanding: The most commonly perceived factor contributing to
losses was the lack of knowledge and understanding of the market (91.3%).
Figure 1.6
Emotional Decision Making:
Emotional decision-making (89.3%) and lack of risk management practices (89.3%) were
also identified as significant factors.
Figure 1.7
Other factors:
Following tips without research (35.9%), overtrading (87.4%), and lack of a well-defined
trading strategy (85.4%) were also acknowledged as contributors to losses.
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Risk Management Practices:
Risk Management Adherence:
Only a small percentage of respondents (4.8%) reported having a well-defined risk
management strategy and consistently adhering to it.
Basic Understanding: The majority of respondents (87.4%) claimed to have a basic
understanding of risk management but sometimes deviated from it.
Figure 1.8
Behavioural Biases:
Influencing Trading Decisions: The most prevalent behavioural biases reported were
overconfidence (84.5%) and loss aversion (90.3%).
Other biases, including herd mentality, confirmation bias, and anchoring bias, were also
acknowledged by a significant portion of respondents.
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Figure 1.9
Education and Support:
Participation in Education/Training: More than half of the respondents (54.4%) reported
participating in stock market education or training programs.
Figure 2.0
Seeking Advice/Support:
A majority of respondents (56.3%) actively sought advice or support from professionals,
mentors, or online communities in their stock market trading activities.
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Figure 2.1
These findings indicate that retail traders, especially those who are relatively inexperienced,
face challenges related to knowledge gaps, emotional decision-making, and risk management.
The prevalence of behavioural biases suggests the need for educational programs and support
systems to enhance traders' understanding and decision-making skills.
ANNEXURE