Asking someone do you lose money in the stock market indicates our lack of knowledge about stock markets. If you are new to the stock market and wondering if you lose money in the stock market? well, the obvious answer is yes. Losing money in the stock market is just like losing money in any other business. If you don’t know the basics of business that you aspire to do, you are going to burn money as fast as possible.
Why do people lose money in the stock market?
Losing money in the stock markets is not new & it happens all the time. You can make money in stock markets and also lose money. People who lose money in the stock markets because of the following reasons
- Lack of knowledge
- Excess greed
- Excess fear
- Not following their plan
- Not limiting their losses
- Getting involved in news based trading
I might have missed a few points above, but most of them fall under lack of knowledge. Lack of knowledge in stock markets also involves buying or selling a financial asset at the wrong price levels. Usually, when an investor or trader buys at higher price levels or sells at lower price levels, their chances of making losses are high.
You should always look to sell at overpriced levels and buy at underpriced levels after learning about the company and understanding the nature of the business the company is into.
Losing money while trading options
Options trading is very speculative & creates greed in lots of new traders. The possibility of making unlimited returns by buying options contracts draws the attention of beginner traders. It might sound like we can make 10x times our investment if we bet right in options. But traders don’t realize that they can end up losing the entire capital they used to buy options contract if they are wrong.
And few traders & investors also lose money by selling an options contract. Selling options can be risky if you don’t know how to minimize the losses. Option contracts should be utilized for hedging purposes & as a tool to protect your losses during an uncertain event.
What should you do if you are losing money in the stock market?
If you are among those who are consistently making losses in the stock market, you probably need to stop investing or trading in options. There is a famous saying in stock markets
In Stock markets, money is always transferred from 99% of people who don’t know what they are doing to that 1% of people who know what they are doing.
What you need to do is learn, gather knowledge & execute with a small capital initially when you start with stock markets. Once you start gaining practical experience about how things work in stock markets, slowly you can increase your capital.
How to minimize losses in the stock market
Even before you start investing or trading in stock markets, you need to fix your maximum loss capacity. For example, if you wish to invest $10000 in stock markets & your maximum loss capacity is not more than $3000, you should close all your positions when you are about to lose $ 3000. You can not simply sit and procrastinate that your losses will recover automatically.
Deciding a maximum loss capacity helps you in diversifying your overall risk capacity in smaller parts. You can keep your maximum stop loss per investment or trade up to $300 and create a portfolio of 10 different investments or trades with proper quantification. You will reach your maximum loss capacity of $3000 only if all trades go against you.
So to minimize your losses in stock markets, you need proper risk management skills and stick to your plan. Always look to buy good stocks that are financially strong at lower price levels & sell stocks that are financially poor at higher price levels.
Use fundamental analysis as well as technical analysis for minimizing your losses in stock markets. Simply don’t blindly trust just one factor in the stock market.
How to recover money lost in the stock market
There is no way you can recover your lost money from stock markets. I know it feels harsh when I say that. But the reality is you can make new money from the stock markets once you know how the stock market works & stick with your trading and investing plans.
To make money in stock markets, you will have to gain practical experience with a low capital first. As we all can lose money initially because of lack of experience, it’s better to start with very low capital initially.
The purpose of this post is to give you a clear idea that anyone can lose money in stock markets & anyone can make money in the stock markets. You need to treat stock markets like any other business out there. It takes lots of learning and practical experience to make consistent returns from the stock market.