The stock market is an ideal means of securing your funds with the hope of reaping greater returns than your local bank would provide. However, you can also lose money when investing in stocks and even go into debt.
The stock market can make you poor, especially if you plan on day trading. Usually, people fail in the stock market when investing without prior research, choosing penny stocks, and not diversifying their portfolio. To succeed in trading stocks, make long-term investments with sound businesses.
This article will discuss common mistakes that people make when investing in the stock market and how to avoid them. Additionally, I will give you helpful tips for finding success when trading stocks.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How Do People Lose Money When Investing in the Stock Market?
You can lose on your investment for several reasons. The leading cause for financial loss on the market is following poor advice. ResearchandRanking.com notes that many companies send out fraudulent stock information to encourage watchers to make bad investments.
To avoid this happening to you, ensure that you research the stocks you’re eyeing before making a purchase.
Moreover, during your investigation, check to see that the company is fundamentally sound. A good issuing company will have transparent business models and financial statements available for anyone interested in investing with them.
In addition to a lack of research, people lose money on the stock market by complicating their portfolios. Having too many funds in dissimilar industries could be detrimental to your finances.
Some industries impact others. For example, when the travel industry rises, tourism will as well. Therefore, diversifying your investments could be positive, but it is often negative if you overdo it. One industry’s failure could adversely impact several of the sectors in a portfolio. If this happens, the investor’s account will go in the red due to drastic losses.
There are many other mistakes that investors make on the stock market that could land them in poverty.
Investing in Penny Stocks Will Almost Always Guarantee a Financial Loss
A penny stock always seems like a good purchase because of its low prices. However, their value is often linked to their cost, meaning that there is little demand for the stock. In most cases, people who buy penny stocks end up at a loss.
Unless the low-cost stock has a very reputable issuing company, avoid penny stocks. These shares are notorious for being mismanaged and hurting the trader. Moreover, companies that sell penny stocks are often shut down for fraud, causing the investor to lose out due to the end of their operations.
Short-Term Trading Leads to the Most Losses
Many investors agree that the stock market offers long-term benefits, so holding a stock for less than a year usually results in a financial loss.
Stock prices are affected by the news, economic climate, and changes in global or political factors. Therefore, the cost of shares will frequently fluctuate during the year. Stock prices can drastically lower in a few months, leaving the buyer at a net loss when selling.
When prices drop, some traders try to sell their stock as soon as possible. However, a stock’s price could continuously drop for several months then double in value over several years. Selling too early eliminates your chance at huge profits later on.
The key to saving money in the stock market is buying a stock and holding it until you land in the profit. There are exceptional cases where this may never happen for some shares, but that is the goal.
A Uniform Portfolio Is Risky and Usually Creates Expenses
Stock traders with non-diverse portfolios cannot survive specific economic changes like when a sector experiences a recession. By investing all of their funds into one industry or one stock, traders will lose a lot of money if that sector fails.
This problem is often the case with beginning investors who do not have much capital to purchase various stocks, so they concentrate on one area hoping for the best. But this is not recommended.
To avoid loss in the market, expert traders suggest that you combine stock investments with:
- REIT
- Bonds
- Real Estate
- Gold
- Silver
- Cash
- Commodities
Another way to prevent this failure is to invest in opposing industries. If you are a beginner, start investing when you have enough assets to diversify your stock portfolio.
Broker Fees Can Also Cause You To Lose a Lot of Money on the Stock Market
Before investing in the stock market, you must get in touch with a broker to set up an account. Notably, brokers do not perform services for free. Sometimes, young investors will sign up for brokers with hidden fees or outrageous prices.
By doing this, regardless of whether the stock brings in a profit, the broker fees will consume any revenue you gain.
It would help if you took the time to become familiar with your broker’s fees and be sure that you are comfortable with them before buying a stock.
Buying on Margin Causes People To Lose on Their Investments
Another way that investors lose large amounts of money is by buying on margin. To do this, buyers pool their money with other interested investors to purchase a stock. If the share appreciates, the buyer will make a small profit.
But when the stock falls, the investor has to pay a percentage of the stock’s decreased value. This strategy is the riskiest way to trade because a one-dollar investment could turn into a thousand-dollar expense or more.
Who Succeeds in the Stock Market?
Most estimates state that only 10% of investors succeed in the stock market. Often, this is the result of losses from day traders.
The best means of making a profit on the stock market is to collect dividends. However, this revenue amount is only significant when given time to accumulate. In the beginning, most dividends tend to be small.
The stock market pays out about 10% annually to its shareholders. Thus, the key to success when trading is to hold stocks until their dividends compound or increase. After a few years, you can sell the share for a profit, if possible.
Tips To Succeed in the Stock Market
Outside of holding your stock, there are other things you can do to ensure gains on the market:
- Focus on management quality. Research how the company treats its shareholders before making a purchase.
- Stick to your investment rules. Develop an investment strategy and never stray from it unless you choose to update your system.
- Wait for profits to grow. Successful investors urge beginners to allow their earnings to increase and not sell at the first sign of monetary gain.
- Take chances. Do not be afraid to buy stocks that you have done extensive research on.
- Keep money on hand. Buying opportunities are spontaneous, and you want to be ready when they present themselves.
- Use trusted sources in your research. The best place to gain information is the company’s website. If you have additional questions, get in touch with the issuers.
- Avoid buying stocks with short-term gains. If a stock’s company has already started distributing large dividends, you likely missed your chance to invest.
- Study the momentum of a company. Companies that aren’t doing well right now could have the potential to double or triple in later years.
- Do not invest when overjoyed or frustrated. Ideally, you want to invest based on logical reasoning only. Making purchases with heightened emotions usually goes wrong.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
You can start investing in the stock market with as little as one-thousand dollars or less. For new investors, it’s probably better to start with fewer funds to decrease the risk of bankruptcy.
During the first few months in the stock market, you should develop a strategy for trading. Nate O’Brien has a video for investing in the stock market as a beginner:
You may not make millions in your first year, but continuously working with the stock market can lead you to financial freedom.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
Recent Posts
Exploring Social Trading: Community, Profit, and Collaboration
Have you ever wondered about the potential of social trading? Well, that curiosity led me on a fascinating journey of surveying over 1500 traders. The aim? To understand if being part of a trading...
Ah, wine investment! A tantalizing topic that piques the curiosity of many. A complex, yet alluring world where passions and profits intertwine. But, is it a good idea? In this article, we'll uncork...