Top 10 Reasons Why People Lose Money in Stocks
#1: They Hold Onto Losing Stocks If you don't cut your losses, they can run lower and lower until your grave is too deep.
If your portfolio drops by 50% then it will take a 100% increase just to break even again.
How often do you see people making 100% increases? Thats why you don't want to get yourself in that deep of a hole.
Also, if your stock is causing you losses then it is a weak stock right? Think of it this way: you invest $10,000 in a stock that drops in value down to $5,000.
Since this stock is so poor and caused you a 50% loss, pretend that instead of having $5,000 worth of that stock, you instead had $5,000 in cash.
Would you invest that $5,000 cash into that poor stock or would you use that $5,000 cash to invest in a stronger stock? You would obviously use that $5,000 in a stronger stock, so wouldn't it make sense to sell your bad stock and use that money to invest in a stronger stock? Just because that stock put you in a hole doesn't mean you have to use that same stock to get you out of the hole.
The problem is that people sit and hope that the stock will eventually come back to the price they purchased it at, and as they sit and wait, the stock drops lower and lower until your grave is too deep.
Learn when you are wrong and cut your losses.
#2: They Try to Predict and Anticipate What Will Happen Next This will save you a lot of money: First, there is no problem with trying to predict what will happen next, the real problem is when you ACT upon that prediction before it actually happens.
Believe it or not, this is gambling; you are putting your money on an event that may or may not happen! What you should do instead is make a prediction, and act on it only AFTER the market confirms that you are correct.
Of course you might miss out on a little profit since you weren't in the stock AS it made a move, but catching it IMMEDIATELY after is good enough and that small amount of missed profit can act as "insurance" that you were correct.
How can this save you money? If you make a prediction and act on it before it happens, then if you end up being wrong then you will lose money.
So which scenario sounds better to you: losing money, or missing out on a little profit but still making money? Opinions are often wrong, but the market is always right.
Wait for confirmation from the market that your prediction is correct.
Patience is a virtue.
#3: They Don't Know When to Sell You can be the best stock picker in the world, and have the best timing, but if you don't know when to sell then you will never succeed in the market.
If you don't sell out of a losing stock then you will obviously lose a lot of money, but selling is also important when you are in profit.
If you don't know when to sell and take a profit, then your profits can easily turn into a loss.
The following story is a MUST read! A man set out a trap to catch rabbits.
This trap was a large cage with food inside and had a drop-down door held up by a stick attached to a string that he held out of view so the rabbits couldn't see him.
When he had enough rabbits inside the cage, he could pull the string and the door would shut and trap all of the rabbits.
One day, the man had a record of 15 rabbits inside his cage.
Thrilled as can be, the man thought, "Ok, just ONE more rabbit and I will close it!" So he sat for a moment hoping for just ONE more rabbit to enter the cage.
As he waited, 4 rabbits ran out of the cage.
Now with only 11 left, the man became upset that he was greedy and told himself that he should have just closed the trap when he had 15.
Since 2 of the escaped rabbits were still sitting right by the edge of the trap, the man told himself, "If one of those rabbits goes back in the cage then I am done.
" As the man waited, a loud noise scared 6 more rabbits out of the cage.
He became furious at the fact that he had a record of 15 rabbits in the cage, but he was only left with 5.
Now he felt he had nothing to lose and decided he might as well just wait and see if he could get some back in the cage.
As time went on, he was soon left with no more rabbits.
Keep this story in mind.
Learn when to sell and take a profit; don't sell to early and miss out on more profits, but then again don't sell too late and lose all of your profit.
You will master this skill if you invest time into reading a few books I recommend.
#4: They Buy More Stock as it Drops in Price Plain and simple, it is within our human nature for us to try to get bargains.
Why pay more for something when we can pay less? If your favorite pair of shoes go on sale, then of course you should buy them.
However, if a stock makes a significant drop in price - BEWARE! You get what you pay for in the market; if a stock drops, it drops for a reason.
If the stock was really strong and in demand, then would it be dropping lower and lower? No.
That means your dropping stock most likely is not very strong and in demand.
Would you rather have a weakening stock that is going lower and lower, or would you rather have a strong stock that is going higher and higher.
Stop drooling over the saying "Buy low and sell high.
" If it was really as simple as buying low and selling high, wouldn't everybody in the world be rich?! #5: Lack of Knowledge As I've said before: You don't always have to learn the hard way.
You shouldn't have to lose thousands of dollars in the stock market before saying, "ok, I think I need to find a better strategy.
" The problem with the stock market is that anybody can join at any time.
Would you try out for a baseball team if you've never even played baseball before? Of course not! The reason so many people lose a fortune in the stock market is simply because they are not educated about the market, they jump in too soon, and they want to get rich quick.
If you don't learn all you can about the market first, then you are setting yourself up for failure.
#6: They Try to Find a "Diamond in the Rough" that Nobody Else has Found First of all, consider the fact that there are hundreds of Wall Street institutions with huge teams of researchers.
So what do you think the chances are that out of all of those hundreds and hundreds of teams of researchers, not a single one of them has come across the stock that you think is a "diamond in the rough" that nobody else has found yet? The fact is, many researchers have found that stock and skipped it, most likely for good reason.
That isn't even the main point, the main point is this: sure, you can go find a stock that nobody else knows about and it might potentially be a good stock one day.
However, if you put your money into this unknown stock then you may be sitting and waiting for years until that stock finally comes alive.
So the question is, would you rather try to find what nobody else knows about and sit and wait for years, or would you rather take advantage of the stocks that are CURRENTLY gaining steam? I hope you would rather catch the stocks that are currently picking up momentum.
Although it may be better to catch the stocks that are currently picking up speed, don't be late to the party! The consequences for being late to the party are next...
#7: They Flock to the Stocks that have Already Seen Their Biggest Gains and are Obvious to Everybody After a stock makes a huge run up in price and becomes the topic of conversation between customers at the grocery store, then it is obvious that this stock has become obvious to everybody.
By this time, it is most likely that everybody who is going to buy this stock has already bought it; it is so popular that it is running out of buyers.
If the stock is running out of fresh buyers then demand drops and what is next? Selling time.
The big Wall Street funds need buyers to absorb all of their shares so they sell them all to unfortunate individuals that notice a stock and invest in it after it has seen its biggest gains and the fun times are ending.
This was seen in AOL and many other tech stocks in the 1990's.
They all soared through the sky and when everybody knew about them, they began to decline.
Most of those stocks never recovered.
This concept was also seen a few years ago after the stock market hit all new highs in late 2007.
The stock market's record high was the topic every day on the news; everybody knew about it, everybody was investing.
Everybody knows what happened next.
#8: They Listen to Wall Street "It isn't what we don't know that gives us trouble, it's what we know that ain't so" - Will Rogers Wall Street wouldn't exist without you; they need your money.
Listening to Wall Street can sometimes be as bad as taking advice from a salesman (depending upon who and under what circumstances of course).
Take the 2007 recession for example.
Do you think Wall Street would give you good advice and say, "These are horrible market conditions, it would be wise of you to take all of your money out of your accounts that you hold with our company to prevent further losses" - of course they wouldn't say that! They have way too many customers to care for; they just see you as a source of money and will tell you what you want to hear - just like the salesman.
Also, due to their size, Wall Street firms have to invest differently.
Some might play it safe and use dividends as their main source of profit.
That is not as easy for individuals.
Take this for example: you buy 1,000 shares of a $20 stock for $20,000 and a Wall Street institution buys 1,000,000 shares for $20,000,000.
The stock pays a dividend of 10 cents per share.
You will only make $100 per quarter worth of dividends - that is nothing at all.
However, the Wall Street firm with 1,000,000 shares will be making $100,000 per quarter and with that money they can buy an additional 5,000 shares and keep compounding the dividends.
That works for them since they are working with such large numbers, but to the small individual investor, the profits are just way too small to act as a primary investment strategy.
There are many more differences between individual investors and Wall Street that must be taken into account, but I can't write a whole book about it on this website so if you are interested in learning how listening to Wall Street can hurt your portfolio then I suggest (as always) to read the various investment books listed on this website.
The best of these books (but not all of them) are written by very successful individual investors, not the stuck up Wall Street "salesmen.
" #9: They Watch TV and the So-Called "Experts" Unfortunately, TV is not always the best source of information.
Of course one could argue that the daily news is very important - I agree, it is.
However, stock shows are not the best source of investment advice.
Their ultimate goal is to attract viewers, boost ratings, and charge more for advertisements.
I am not being cynical; this is the truth.
They aren't going to discuss the best possible investment opportunities, instead, they are going to discuss things like Microsoft, Google, AT&T, and other big names that attract attention.
They will put up headlines like "Analysts claim stock "XYZ" will increase by 9,999% over the next year!!!!" That of course is exaggerated, but you get the point: the media does whatever it needs to in order to attract attention; that is what it does best.
The only thing you should use those stock shows for is just to see what is going on in the market in general.
Just don't fall for their headlines and invest your life savings into their "hot stock pick of the day.
" #10: They Want to Get Rich Quick The average person views the stock market as a place to get rich quick, or at least as an easy way to make money.
Then they lose all of their money to the people that actually take the time to educate themselves on the market; the people that take the market serious and therefore make money.
If anybody could jump right in and make a fortune then everybody would be rich.
It IS true that anybody can make a fortune in the stock market, but not without the proper self-education and attitude.
If your portfolio drops by 50% then it will take a 100% increase just to break even again.
How often do you see people making 100% increases? Thats why you don't want to get yourself in that deep of a hole.
Also, if your stock is causing you losses then it is a weak stock right? Think of it this way: you invest $10,000 in a stock that drops in value down to $5,000.
Since this stock is so poor and caused you a 50% loss, pretend that instead of having $5,000 worth of that stock, you instead had $5,000 in cash.
Would you invest that $5,000 cash into that poor stock or would you use that $5,000 cash to invest in a stronger stock? You would obviously use that $5,000 in a stronger stock, so wouldn't it make sense to sell your bad stock and use that money to invest in a stronger stock? Just because that stock put you in a hole doesn't mean you have to use that same stock to get you out of the hole.
The problem is that people sit and hope that the stock will eventually come back to the price they purchased it at, and as they sit and wait, the stock drops lower and lower until your grave is too deep.
Learn when you are wrong and cut your losses.
#2: They Try to Predict and Anticipate What Will Happen Next This will save you a lot of money: First, there is no problem with trying to predict what will happen next, the real problem is when you ACT upon that prediction before it actually happens.
Believe it or not, this is gambling; you are putting your money on an event that may or may not happen! What you should do instead is make a prediction, and act on it only AFTER the market confirms that you are correct.
Of course you might miss out on a little profit since you weren't in the stock AS it made a move, but catching it IMMEDIATELY after is good enough and that small amount of missed profit can act as "insurance" that you were correct.
How can this save you money? If you make a prediction and act on it before it happens, then if you end up being wrong then you will lose money.
So which scenario sounds better to you: losing money, or missing out on a little profit but still making money? Opinions are often wrong, but the market is always right.
Wait for confirmation from the market that your prediction is correct.
Patience is a virtue.
#3: They Don't Know When to Sell You can be the best stock picker in the world, and have the best timing, but if you don't know when to sell then you will never succeed in the market.
If you don't sell out of a losing stock then you will obviously lose a lot of money, but selling is also important when you are in profit.
If you don't know when to sell and take a profit, then your profits can easily turn into a loss.
The following story is a MUST read! A man set out a trap to catch rabbits.
This trap was a large cage with food inside and had a drop-down door held up by a stick attached to a string that he held out of view so the rabbits couldn't see him.
When he had enough rabbits inside the cage, he could pull the string and the door would shut and trap all of the rabbits.
One day, the man had a record of 15 rabbits inside his cage.
Thrilled as can be, the man thought, "Ok, just ONE more rabbit and I will close it!" So he sat for a moment hoping for just ONE more rabbit to enter the cage.
As he waited, 4 rabbits ran out of the cage.
Now with only 11 left, the man became upset that he was greedy and told himself that he should have just closed the trap when he had 15.
Since 2 of the escaped rabbits were still sitting right by the edge of the trap, the man told himself, "If one of those rabbits goes back in the cage then I am done.
" As the man waited, a loud noise scared 6 more rabbits out of the cage.
He became furious at the fact that he had a record of 15 rabbits in the cage, but he was only left with 5.
Now he felt he had nothing to lose and decided he might as well just wait and see if he could get some back in the cage.
As time went on, he was soon left with no more rabbits.
Keep this story in mind.
Learn when to sell and take a profit; don't sell to early and miss out on more profits, but then again don't sell too late and lose all of your profit.
You will master this skill if you invest time into reading a few books I recommend.
#4: They Buy More Stock as it Drops in Price Plain and simple, it is within our human nature for us to try to get bargains.
Why pay more for something when we can pay less? If your favorite pair of shoes go on sale, then of course you should buy them.
However, if a stock makes a significant drop in price - BEWARE! You get what you pay for in the market; if a stock drops, it drops for a reason.
If the stock was really strong and in demand, then would it be dropping lower and lower? No.
That means your dropping stock most likely is not very strong and in demand.
Would you rather have a weakening stock that is going lower and lower, or would you rather have a strong stock that is going higher and higher.
Stop drooling over the saying "Buy low and sell high.
" If it was really as simple as buying low and selling high, wouldn't everybody in the world be rich?! #5: Lack of Knowledge As I've said before: You don't always have to learn the hard way.
You shouldn't have to lose thousands of dollars in the stock market before saying, "ok, I think I need to find a better strategy.
" The problem with the stock market is that anybody can join at any time.
Would you try out for a baseball team if you've never even played baseball before? Of course not! The reason so many people lose a fortune in the stock market is simply because they are not educated about the market, they jump in too soon, and they want to get rich quick.
If you don't learn all you can about the market first, then you are setting yourself up for failure.
#6: They Try to Find a "Diamond in the Rough" that Nobody Else has Found First of all, consider the fact that there are hundreds of Wall Street institutions with huge teams of researchers.
So what do you think the chances are that out of all of those hundreds and hundreds of teams of researchers, not a single one of them has come across the stock that you think is a "diamond in the rough" that nobody else has found yet? The fact is, many researchers have found that stock and skipped it, most likely for good reason.
That isn't even the main point, the main point is this: sure, you can go find a stock that nobody else knows about and it might potentially be a good stock one day.
However, if you put your money into this unknown stock then you may be sitting and waiting for years until that stock finally comes alive.
So the question is, would you rather try to find what nobody else knows about and sit and wait for years, or would you rather take advantage of the stocks that are CURRENTLY gaining steam? I hope you would rather catch the stocks that are currently picking up momentum.
Although it may be better to catch the stocks that are currently picking up speed, don't be late to the party! The consequences for being late to the party are next...
#7: They Flock to the Stocks that have Already Seen Their Biggest Gains and are Obvious to Everybody After a stock makes a huge run up in price and becomes the topic of conversation between customers at the grocery store, then it is obvious that this stock has become obvious to everybody.
By this time, it is most likely that everybody who is going to buy this stock has already bought it; it is so popular that it is running out of buyers.
If the stock is running out of fresh buyers then demand drops and what is next? Selling time.
The big Wall Street funds need buyers to absorb all of their shares so they sell them all to unfortunate individuals that notice a stock and invest in it after it has seen its biggest gains and the fun times are ending.
This was seen in AOL and many other tech stocks in the 1990's.
They all soared through the sky and when everybody knew about them, they began to decline.
Most of those stocks never recovered.
This concept was also seen a few years ago after the stock market hit all new highs in late 2007.
The stock market's record high was the topic every day on the news; everybody knew about it, everybody was investing.
Everybody knows what happened next.
#8: They Listen to Wall Street "It isn't what we don't know that gives us trouble, it's what we know that ain't so" - Will Rogers Wall Street wouldn't exist without you; they need your money.
Listening to Wall Street can sometimes be as bad as taking advice from a salesman (depending upon who and under what circumstances of course).
Take the 2007 recession for example.
Do you think Wall Street would give you good advice and say, "These are horrible market conditions, it would be wise of you to take all of your money out of your accounts that you hold with our company to prevent further losses" - of course they wouldn't say that! They have way too many customers to care for; they just see you as a source of money and will tell you what you want to hear - just like the salesman.
Also, due to their size, Wall Street firms have to invest differently.
Some might play it safe and use dividends as their main source of profit.
That is not as easy for individuals.
Take this for example: you buy 1,000 shares of a $20 stock for $20,000 and a Wall Street institution buys 1,000,000 shares for $20,000,000.
The stock pays a dividend of 10 cents per share.
You will only make $100 per quarter worth of dividends - that is nothing at all.
However, the Wall Street firm with 1,000,000 shares will be making $100,000 per quarter and with that money they can buy an additional 5,000 shares and keep compounding the dividends.
That works for them since they are working with such large numbers, but to the small individual investor, the profits are just way too small to act as a primary investment strategy.
There are many more differences between individual investors and Wall Street that must be taken into account, but I can't write a whole book about it on this website so if you are interested in learning how listening to Wall Street can hurt your portfolio then I suggest (as always) to read the various investment books listed on this website.
The best of these books (but not all of them) are written by very successful individual investors, not the stuck up Wall Street "salesmen.
" #9: They Watch TV and the So-Called "Experts" Unfortunately, TV is not always the best source of information.
Of course one could argue that the daily news is very important - I agree, it is.
However, stock shows are not the best source of investment advice.
Their ultimate goal is to attract viewers, boost ratings, and charge more for advertisements.
I am not being cynical; this is the truth.
They aren't going to discuss the best possible investment opportunities, instead, they are going to discuss things like Microsoft, Google, AT&T, and other big names that attract attention.
They will put up headlines like "Analysts claim stock "XYZ" will increase by 9,999% over the next year!!!!" That of course is exaggerated, but you get the point: the media does whatever it needs to in order to attract attention; that is what it does best.
The only thing you should use those stock shows for is just to see what is going on in the market in general.
Just don't fall for their headlines and invest your life savings into their "hot stock pick of the day.
" #10: They Want to Get Rich Quick The average person views the stock market as a place to get rich quick, or at least as an easy way to make money.
Then they lose all of their money to the people that actually take the time to educate themselves on the market; the people that take the market serious and therefore make money.
If anybody could jump right in and make a fortune then everybody would be rich.
It IS true that anybody can make a fortune in the stock market, but not without the proper self-education and attitude.
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