Many investors and entrepreneurs find success in the stock market by following a few simple rules. They master simple methods to grow and compound their money over time.
On the other hand, some investors fail. They lose so much money trough trading. They wonder what went wrong, what mistakes they made, and how they can stop losing money in the stock market.
If you’re an individual investor who wants to avoid costly mistakes, this page is for you. We’ve laid out the DON’Ts of investing—follow these nine simple guidelines to help protect your portfolio from unnecessary losses.
How to Avoid Losing Money in the Stock Market?
1. Don’t Use High Leverage
Yes, we know—the higher the risk in stock trading, the higher the potential reward. But many investors forget that higher leverage can also lead to higher fees and bigger losses.
For instance, if you apply too much leverage, most brokers will charge daily or overnight fees. And if the stock price reverses, you may end up needing more time just to break even—or to wait longer for your position to recover and move toward your target.
We’re not against using leverage. Just use it with caution, and only risk money you can afford to lose.
2. Don’t Invest All Your Money in One Asset
Trading in the stock market is risky, so wise investors do everything they can to minimize those risks. If you invest all your money in just one company, you’re not reducing risk—you’re increasing it. Plus, you miss out on the opportunity to earn more by investing across different industries.
For example, if you have $1,000, you can spread it across 5 or more companies from various sectors. That way, if one company or sector underperforms, the others may still help grow your investment.
Choose strong, reliable companies, and allocate your funds by buying shares in batches at different times. As much as possible, avoid investing more than 10% of your capital in a single company.
3. Don’t Try to Time the Market
The stock market is highly volatile. Nobody knows for sure if it will rally later today or crash tomorrow. That’s why we shouldn’t try to predict what will happen next.
If a pandemic or crisis occurs, treat it as a once-in-a-lifetime opportunity. In every crisis, there is an opportunity.
Many investors wait for the “perfect” time when stock prices move in their favor. But by doing so, they often miss profitable opportunities. Remember: time in the market is better than timing the market.
4. Don’t Chase Money to Make Money
Just because a company gained 12% yesterday doesn’t mean it will happen again right away. Many investors buy out of excitement when they see a stock skyrocket. They chase the big gainers, hoping to make quick profits.
But the stock market goes up and down. It won’t always be bullish—and it won’t always be bearish either.
It’s important to remember that the stock market will always go through corrections. To increase your income potential, consider buying more during dips or market corrections. Then, either lock in your profit when a stock reaches its all-time high or hold your stocks for the long term.
5. Don’t Close Losses in the Short Term
If you’re investing in companies with solid balance sheets, strong fundamentals, excellent track records, a bright outlook, and no leverage, hold your shares—even if you see red numbers in your portfolio.
Remember: unrealized losses only become real once you close the position. If your trades are not leveraged, don’t exit too quickly. Most blue-chip stocks tend to recover over time. Always remind yourself why you invested in those companies in the first place.
If you’re holding robust companies—especially those listed on top stock market indices—stay invested even when they’re in the red. Consider buying more during dips. Be patient and wait for the market to rally before taking profits.
If nothing happens—I mean no improvement at all about the company—after a year, then you can start exploring other options.
6. Don’t Rely Too Much on Analysts
Yes, there are many financial analysts and fund managers who share their stock recommendations. Sometimes, when a well-known investment firm upgrades the target price of a particular stock, the stock surges the next day. The opposite can happen when they issue a downgrade.
Analyst recommendations can be helpful, but remember—they’re not always accurate.
It’s important to start analyzing the market and your own portfolio composition. Learn the fundamentals and use technical indicators when picking stocks and examining price movements. That way, you can set 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 events or information that can impact stock prices. They can trigger market reactions and include things like breaking news, earnings results, analysts’ recommendations, business expansions, changes in management, or global events.
Most of the time, the effects of catalysts are short-lived. You can use them to identify trading opportunities and minimize losses in the stock market.
For example, if a top 5 blue chip stock price suddenly drops by 15% due to a misleading tweet or negative publicity, you could use a small portion of your available funds to buy shares. The price might likely return to its previous level. Lock in your profit when it reaches a 10% to 12% gain—but don’t be greedy!
8. Don’t Sell in Panic
When there’s a pandemic for example, the stock market is crashing, and there’s no vaccine, many novice investors panic and sell as quickly as possible during a major event that cripples the economy. As a result, they end up losing a lot of money.
We must stay calm when the market drops significantly. Panicking will only cause us to lose focus. Instead, we should assess the situation carefully.
While stocks may have fallen drastically, this could present a rare opportunity to buy at a discount. Just look at what happened with the NASDAQ 100—it reached an all-time high just three months after the massive drop caused by the pandemic.
9. Don’t Trade If You Can’t Take Risks
Yes, the stock market offers many income opportunities for skilled traders and value investors. However, the only certainty about the stock market is uncertainty.
Don’t trade if you can’t handle risks, because “every once in a while, the market does something so stupid it takes your breath away.” — Jim Cramer
More Stock Market Guides:
- Best Warren Buffett Stocks to Buy Now
- 18 Golden Rules to Grow Money in the Stock Market
- Top 25 Stocks to Invest in the USA
- 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.
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