Many investors and entrepreneurs find success investing in the stock market following a few simple rules. They master the simple methods to grow and compound their money.
On the other hand, some investors fail. They lose so much money trading. They wonder what went wrong, what mistakes they made, and how to stop losing money in the stock market.
If you are an individual investor and you want to avoid losing money in the stock market, this page is for you because we lay out the DON’Ts of investing. Follow these nine simple guides to prevent those losses on your portfolio.
How to Avoid Losing Money in the Stock Market?
1. Don’t Use High Leverage
Yes, we know that the higher the risk in the world of stock trading, the higher the reward. Yet many investors forget that the higher the leverage could result in higher fees and losses, too.
For instance, if you apply too much leverage, most brokers charge daily fees or overnight fees. When the stock price went on a reversal, you should expect to compensate more as you would need more time to get even or more time waiting for your position to gain and move towards your target.
We’re not against using leverage. Just use it with caution and risk only the money you can handle to lose.
2. Don’t Invest All Your Money in One Asset
Trading in the stock market is risky, so wise investors do everything in their power to minimize risks. If you invest your money all at once in one company, you’re not reducing risk. You also eliminate the chances to earn more when you invest in different industries.
For instance, if you have $1,000, you can invest it to 5 or more companies ranging from different businesses so that when one company or one sector did not perform well, the other sectors can grow your invested fund.
Choose the best companies, then allocate your funds by buying shares in batches at different periods. As much as possible, don’t invest more than 10% of your capital in one company.
3. Don’t Time the Market
The stock market is very volatile. Nobody knows exactly if it will be bullish later or if it will crash tomorrow. So, we should not predict what will happen.
If a pandemic occurred, take that as a once-in-a-lifetime chance. In every crisis, there is an opportunity.
Many investors wait for the time when the stock price goes in their favor. By doing so, most of the time, they miss profitable opportunities. Time in the market is better than timing the market.
4. Don’t Chase Money to Make Money
Just because that company made 12% gains yesterday doesn’t mean it will happen again instantly. A lot of investors buy on the excitement when they see a stock skyrocket. They chase the big gainers hoping they would gain more.
The stock market goes up and down. It won’t be bullish all the time. It won’t always be bearish either.
It’s important to remember that the stock market will always go through a correction. To add more income potential, buy more on the dips or market corrections and lock in your profit when a stock hit its all-time-high or hold your stocks for long term.
5. Don’t Close Losses in Short Term
If you’re investing in companies with solid balance sheets, excellent fundamentals, outstanding track records, bright outlook, and without any leverage, hold your shares even if you see those red amounts on your portfolio.
Remember that unrealized losses will only become real until closed. If your trade positions have no leverage, don’t close your trade instantly, as most blue-chip stocks will always recover. Don’t forget the reasons why you have invested in those companies in the first place.
If you’re investing in robust companies or those stocks that are listed on the top stock market index, hold your shares even if they’re currently red and buy during the dips. Wait for the market to rally again and close your gains. If nothing happens in a year, consider other options.
6. Don’t Rely on Analysts too Much
Yes, there are many financial analysts and fund managers who share their stock recommendations. There are times that when a famous investment firm upgraded its target price for a particular stock, it would surge the next day. The opposite happens when they downgraded a stock.
Analysts’ recommendations are helpful, but you should remember that they are not entirely accurate.
It helps if we start to analyze the market and our portfolio composition ourselves. Get to know the fundamentals and use technical indicators in picking stocks and examining stock price movements. That way, you can decide your own target prices because, at the end of the day, it’s your money at stake.
7. Don’t Ignore Catalysts
Stock catalysts are information that can affect the movement of stock prices. They can be anything that triggers a reaction on the market. They can be breaking news, earnings results, analysts’ recommendations, business expansion, change in management, and global events.
Most of the time, the effect of catalysts doesn’t last long. You can use it to find trading opportunities and to avoid losing money in the stock market.
For instance, if a stock price dropped 15% suddenly because of a wrong tweet or bad publicity, you can use a small portion of your available funds to buy some shares. The price of the stock could likely go back to the price level in the past week. Lock in your profit at 10% to 12%. Don’t be greedy!
8. Don’t Sell on Panic
There’s a pandemic, the stock market is crashing, and there’s no vaccine. Most novice investors panic and sell as fast as possible when there’s a huge event that cripples the economy. As a result, they lose so much money.
We must remain calm when the market falls too deep. Panicking will only let us lose focus. We should look forward and evaluate the situation.
Stocks may have fallen drastically, but it has given us a rare chance to buy cheap. Just look at what happened with NASDAQ 100; it was on its all-time-high three months after the colossal drop caused by the pandemic.
9. Don’t Trade When You Can’t Take Risks
Yes, the stock market has many income potentials to offer for excellent traders and value investors. However, the only certain thing about the stock market is uncertainty.
Don’t trade if you cannot take risks because “every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer
More Stock Market Tips:
- 18 Golden Rules to Grow Money in the Stock Market
- Top 25 US Stocks to Invest in 2020
- 3 Things You Should Have Before Investing in the Stock Market
Important Note: This article is for information purposes only and should never be considered as professional advice. Every investor has a different risk profile and goal. All investments have risks. Always do your own research before investing in the stock market.