How can you lose money in the stock market
When an investor does not know what he is doing, the stock market becomes a dangerous place for him. Here are some examples of a mistaken attitude to own money that can destroy an investment portfolio.
1. Put “all eggs in one basket”
This is a paradigm about how you can lose money when investing. No matter how big and stable the company and its shares seem to you, investing all the capital in one option is a big risk. It’s not just about small biotech projects or startups from Silicon Valley that went bankrupt. Such a lesson was once given to investors and large enterprises like Enron, Washington Mutual, WorldCom and General Motors..
When it comes to investing, there are no guarantees. Americans lost millions of dollars invested in real estate during the rupture of the “housing bubble” in 2007-2008. Many of them thought the US housing market was super reliable..
Do not rely on one investment opportunity. Diversify the portfolio and distribute money among different companies and financial instruments.
Quickly “decompose” investments in all Russian or foreign companies immediately help the stock exchange investment fund (ETF). This will create a conservative and diversified portfolio without selecting stocks on your own..
In more detail about ETF we told here.
2. Day trading
Beginning investors often pay attention to strong fluctuations in stock prices throughout the day. In a couple of hours, the course of an individual company can grow by several points. It seems that everything is simple: buy stocks cheaper in the morning and sell them more expensive in the evening. It attracts and draws into a speculative game. Many people think that day trading is one of the shortest paths to market wealth. But the situation is the opposite.
According to a study by the University of California at Davis, only 1% of daily traders use a trading strategy that helps them not to lose money. The rest get unstable results, huge risk and large commissions due to frequent purchases and sales.
A sensible investor differs from a speculator in that he invests long-term money (from 3-5 years). Recheck the composition of the portfolio once a quarter or six months and looks at the financial statements of the company, and not at the daily chart of the price of its shares.
3. Leverage
Brokers give money to customers to buy shares in debt. Such a loan is called leverage. This seems to some investors a simple way to increase the profitability and size of investments, but at the same time – it can quickly turn into a nightmare. The broker provides money for a reason, but on the security of purchased shares.
For example, does an investor have 200,000 ?, and he wants to buy securities for 1,000,000 ?, he takes 800,000? at the broker and forms a portfolio. If the investor’s share price rises, then everything is fine. They can be sold at any moment with profit and earn. If it goes down, the broker tracks and counts. He has pledged shares for 1,000,000 ?, the investor borrowed 800,000? When the client’s portfolio price approaches 800,000 ?, the broker can sell all his assets. Thus, the customer will lose their 200,000 ?. Leverage multiplies both risk and potential profit. Still for the use of credit you need to pay interest. Russian brokers have up to 20% per annum.
4. Short
Another way to lose money. Short is a short position. This is a sale of securities that the investor does not own at the time of sale. The purpose of the short is to profit from the fall in the value of the stock. Lending helps to sell securities that the investor does not have. He kind of takes a loan from a broker, sells it and then has to return the taken number of shares back to the broker – that is, buy them back. If the investor buys them cheaper than he sold, the difference between the sale and the purchase will be his profit.
Example. You decided to sell 10 shares of Sberbank with a current value of 2,000?, Which you do not have. For this, the broker provides these 10 shares on credit, which you must then return. You take them and sell them for 2,000?, If the share price falls over time, then you return 10 securities of Sberbank to the broker at a reduced cost. Buy them back, say, for 1,500? and return. 500 difference? your profit.
The risk is not only in the broker’s additional interest on operations, but also in mathematical expectation. When an investor buys stocks, they can grow unlimitedly and his profits are also unlimited. At the same time, shares can fall only to zero – the possible loss is limited by the amount that the investor invested. That is, by buying a million rubles, you can earn one hundred million, but you can only lose a million. The game on the fall turns the picture around. Now profit is limited, and loss is unlimited.
5. Follow the instincts
The sixth sense, which helps a person to navigate well in some life situations, leads along the wrong path in the stock market. You can easily lose money if a person relies on intuition.
Reasonable investors remain disciplined when fear, greed, and the “predictions” of advisers push them toward poor financial decisions. They do not succumb to herd feelings. This usually happens when a market or industry finds itself in a difficult position. It is difficult to resist and assess the situation soberly. People who act on the basis of personal feelings and emotions are moving towards the deprivation of funds. The stock market likes cold math, not impulsiveness..
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There are several ways one can lose money in the stock market. Poor investment choices, lack of research, and timing the market incorrectly can impact your returns negatively. Additionally, market volatility, unexpected economic events, and company-specific risks can also result in losses. It’s important to diversify your portfolio, have a long-term investment mindset, and seek expert advice when necessary. Can anyone share personal experiences or tips on mitigating risk in the stock market?
Can you provide some tips or strategies on how to potentially lose money in the stock market?