The stock market is one of the best ways to make money and build long term wealth for just about anyone.
But with reward, comes risk. Can you lose more than you invest in stocks?
In this post, I'll answer the question “can you lose more than you invest in stocks?” and much more. Let's get started!
Ways You Can Lose More Money Than You Invest
There are several ways you can lose more money than you invest, contrary to the opinion of many investors in the market today.
Let's talk about the worst-case scenario situations to help you steel clear and deal with less risk when attempting to make a profit.
These have the potential to bring in more money, but there's also a risk that they will lose more money than you initially spent on the stock market.
A few of the ways you can lose more money than you invest include the following:
- Using margin accounts to improve a portfolio
- Trying to time the market to maximize profit
- Short selling in the hope of making money
- Investing in the short term
- Not diversifying your portfolio for risk mitigation
Related Reading: Can Stocks Go Negative?
Using Margin Accounts
Margin investing with a margin account is the most common way people lose money in the stock market.
A margin account is an account with a brokerage firm that allows you to borrow money against the value of your current stocks.
This means you can trade more than you have in your account. While this can be helpful to improve a portfolio, it also comes with great risks.
It's a tempting technique offered by many brokerage accounts. Rather than trade with your funds, you can take advantage of borrowed money to build a portfolio much faster than using your own cash.
You have the potential to benefit from a stock with borrowed money – which can make it tempting for many retail investors.
However, sometimes the stock drops without warning. The same stock that had the potential to get you all the money can lose everything. If you lose funds, the same amount drops from the brokerage account. Plus, you need to pay interest on the entire investment.
When using a margin account, it can be easy to lose money because of the interest charged to you when investing.
Investing involves risk, and if you decide to purchase stock with margin trading, you're increasing how much you could lose with your borrowed shares. If you are not comfortable losing double your money and then some, you should not use margin investing.
The amount of interest you will pay varies depending on your brokerage and current market rates. Here's an example of current rates from Charles Schwab.
You can see how high the interest rates are making it an easy way to lose cash in the market.
Trying to Time the Market
It's also possible to lose more money than you invest by attempting to time the market for profit.
According to a study of investors, those who attempted to time the market saw a 12-month return of -19.3%. Those who did not perform any action saw a drop of -3.7% in the same time.
Although some investors swear that timing the market is necessary for above-average returns, the short answer is that the entire amount could be lost with the choice to sell on a whim.
There are also two risks associated with the vast majority of those trading by timing the market:
- High trading expenses: Investors who buy and sell increase commission charges.
- Raised taxes: A bought or sold stock means a taxable event has happened. You could bring on more taxes depending on your past performance.
Trying to time the market is a poor choice when investing in stocks. The success stories are rare, and it's more likely that an investor will lose more money than they put in.
Short selling is an advanced investing strategy that some investors attempt to take on and can result in lost money.
When it comes to short selling, you’re hoping that the price of a stock drops so you can close out your position and make money.
In essence, you're betting against a stock rather than for it.
However, if it goes up, you’ll lose more money than your initial investment.
Short selling can be a very risky proposition that even the most experienced investors struggle with.
This is a common way some people lose money in the market.
Investing for the Short Term
Some individuals invest their cash with the hope to get rich quickly in their investing, rather than putting their money into the investment for future results.
Penny stocks are one of the most common culprits investors make when investing for the short term.
Investing for a short period often leads to poor investment performance and increased stress.
What exactly is short term investing?
Investing in the short term means you're looking for a return in a one to three-year window.
This type of investing is generally considered to be riskier because the market can have more fluctuations in a shorter period of time.
Related: Is the Stock Market Gambling?
Diversification is critical when it comes to investments in the stock market.
It reduces risk with your money by placing investments across multiple industries, asset classes, and sectors.
Diversification is one of the most important rules in investing, yet some investors choose to put all their money into one stock or one industry, which could have serious drawbacks.
If you don't diversify, you risk losing everything at once.
For example, if you invest all of your cash into Amazon stock, and the price of the stock falls – your entire portfolio can see a drastic reduction.
However, if you invest in an index fund, the price of individual stocks won't matter nearly as much. In this scenario, the entire stock market would need to decline for your investment portfolio to dwindle.
If you want to build wealth from nothing, diversification is essential so you don't lose money when you start investing.
What Are the Chances of Losing Money in the Stock Market?
If you're afraid of losing money when investing, it's critical to note that all investing involves risk.
No matter how much you put in, there's still a chance that you will not get anything back from your stocks at the end of the day.
What are the chances of losing money on the stock market for the average person investing in stocks?
On average, losses occur every one out of four years for those who have been investing in the stock market for a long time.
If you put cash in the stock market, it's critical to note that you are taking a risk.
You can make smart investment choices and even pay for the best advice. Still, it might not pay off at the end of the day. Everyone is at risk to lose money, no matter their experience level in the world of investing.
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How to Avoid Losing Money in the Stock Market
Now that we've gone over all the risks that come with the stock market, are there any ways to avoid losing money? Let's discuss some of the best ways to avoid losing money in the stock market.
According to Fool.com, here are some of the best ways to keep more cash in your pocket when messing with the stock market:
- Be realistic with expectations: When investing, you have to be honest about the value and expected return of your investments. You can stand bad years if you understand that investing involves highs, lows, and stagnant moments compiled into decades of investing. It's almost impossible for a stock to be one big gain over the years. It comes with ups and downs.
- Understand realized and unrealized loss: Unrealized losses and gains will show up in your account, but they only become realized once you sell them. As long as you stay invested, your unrealized loss could turn into a realized gain in the future.
- Pick an appropriate time horizon: It's critical to consider the time horizon for your investment. Do you need the value to rise in a few years, or are you okay trading far in the future? Investors should invest more or less depending on the time horizon.
- Keep your emotions in check: Emotions can bring everything to a grinding halt when it comes to the value of an investment. If you're losing money, it's easy to get frustrated and sell. Sometimes, hanging on to your losses amid turmoil can lead to eventual gain.
- Invest in correlation to your risk comfort level: Never risk more than you are comfortable losing. Don't borrow money unless you are ready to lose money. Balance your investment with the risk you're okay with within a trade.
Investing is risky. There is a potential to earn some serious cash, but also a chance to lose everything. Get your head in the game before you make any critical choices.
It's also critical to remember that the stock market is always on the move. What looks like a loss can turn into an eventual win if you give it enough time.
Related: How to Make a Living Trading Stocks
Can You Lose More Money than You Invest in Futures?
Trading futures tends to be a more speculative endeavor than buying stocks. There are contracts for different commodities, ranging from pork belly to natural gas.
When you invest in futures, you're betting that the underlying asset will either go up or down in value.
If you're correct, you make money off the contract. If you're wrong, you lose money.
It's important to remember that you can lose more money than you put into a futures contract.
Can You Lose More Money than You Invest in Options?
Options are a bit more complex than futures. With options, you're buying the right to buy or sell an asset at a later date. The stock's price will determine whether or not you make or lose money on the contract.
If the stock price goes up and you have a call option, you can exercise your right to buy the stock at a lower price than the current market value and then turn around and sell it for a profit.
If the stock price goes down and you have a put option, you can exercise your right to sell the stock at a higher price than the current market value and then buy it back at a lower price, pocketing the difference.
There are many different variations of options, and there are risks involved with each one.
When you invest in options, there is always the potential to lose more money than you put in.
Final Thoughts on Losing Money in Stocks
Can you lose more than you invest in stocks?
The answer to that question is a resounding yes. You can lose money if you use margin accounts, try to time the market, short sell, invest for the short term, or fail to diversify. There's a chance for you to win big when putting money in the stock market, but there's also the possibility of severe loss.
No matter what you invest in, knowing what can cause loss and gain will better prepare you for the journey ahead.
There will be good years, bad years, and some that fall right in the middle. As long as you are realistic, understand the types of loss, know your time horizon, keep your emotions in check, and invest based on your comfort level, you'll be okay.
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