Investment in the stock market has been one of the best income streams in modern times, but this does not mean that every investor in this market makes money. The volatility of this market comes with its risks, and there is a possibility of losing your money, which creates the potential for high returns. Here are some of the reasons people lose money in the stock market.
1. They Attempt to Time the Market
For instance, it may look easy to time the market, Just looking at the stock chart buying when the stocks are low and selling them when they are at the top. This does not happen like that in real-time. As much as it looks appealing to time the market, the problem is that it can make you miss out on big gains, or you may miss an opportunity to buy the stock at its lowest price. For example, when the market is up, stocks may continue going up to gain another 1000% from there. You may be waiting for stocks to lower, and this is where you lose a great opportunity to buy lucrative stocks.
2. Purchasing Bad Stock
It is predetermined that most stocks increase in value with time, but it is also true that some stocks lose value with time. Loss of stock value can be weighted to circumstances where business is losing money. The going concern is operating in a declining industry. This happens in the situations where the purchased stocks were overvalued, or there is a better competitor on the block, or any other reasons.
Overvalued stock may make you lose money in terms of projected income even in times when the market is rising because the actual returns will be lower than the projected return. The same applies to high-risk stocks or penny stocks. These stocks can easily make you lose money because when the market is going up, they can easily lose 50% or more of their value in the short time. Choosing outsized return will make you lose money.
3. Trading options
This is one way of adding leverage to your portfolio. Trading options can make you potentially high returns by investing in smaller amounts. Trading options make a lot of sense for sophisticated investors, but most investors mostly avoid this strategy.
It is very easy to lose your premium or what you paid for when you use trading options. This is because the value of trading options declines over time and eventually expires even when the market is rising. Similarly selling options betting on wrong the direction of stock may make you lose a lot of money even in the time when the market is high. For this reason, it is very advisable to stick with stocks.
4. Using Margin to invest in stock.
Margin is another way to add leverage to your portfolio, just like trading options. However, margin can come with a steep price. Using margin to trade means that you are borrowing money from a brokerage at a nominal interest. This allows you to have more capital to invest, but when the stocks go south, you will end up getting the feared margin call. The brokerage will force you to liquidate your stock holding so that you can clear off the debt for the money you borrowed to invest. This is the easiest way to lose money within a short period of time. The best option is to invest the cash that you have to avoid such scenarios.
5. Amount of Commission Paid
When the market is rising, trading in stock becomes high. The high frequency in trading makes it easy for you to pay so many commissions, especially if you are a frequent trader in options, targeting over-the-counter stocks or other less liquid investments that may be available on every brokerage. These fees can add up and eat into the profits you may have made and create losses for you when the market is rising.
6. Lack of Portfolio Diversification
Owning fewer stocks is a risk that can make you lose your money even in times when the market is rising. This is because few stocks expose you to more risk. For example, other corporations may be making money in times when the market is rising, but for one reason or the other, the company that you are holding stocks in can be losing money. Owning one or two stocks denies you the benefits of diversification, which can help you cancel out the losses made in other sectors and generally allow you to get positive returns at the end of the trading period. A good example was in the past few months when the Corvid pandemic the stock market melted. However, the market rebounded very fast. Stocks that performed well during the pandemic have in the last few months pulled back at the time when stocks in the other sectors are doing well, and the market is rising. If you owned only those stocks, then in the last few months, you have lost your money when other sectors of the economy are proving to make profits. If you diversified across markets, you would have gained during the pandemic and during the last few months when the other economic sectors were booming.
Final Take Away
Losing money in the stock market is a product of common mistakes and poor calculations. You may lose your money in the most unexpected time when the market is rising due to mistakes such as lack of diversification, paying too much commission, attempting to time the market, purchasing bad stocks, among other reasons elaborated above. It is important to remember and note that not everyone makes profits in the stock market because of the volatility of the stocks and common sense. The stock market tends to go up when the economy is growing, but this does not mean that everyone makes money in the booming market due to greedy and fear. When the market is bullish, the decisions you make can make you make more money or lose a huge chunk of your initial investment.
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