Investing in the stock market may be very rewarding financially but if you're not cautious it may cost you your life savings too. It is a high yield high risk type of investment. This means that the return on your investment can be very high but the risk of you losing your money is also high. It is very important for anyone who intends to invest in the stock market to understand this.
Here are common ways to lose money in the stock market.
1. Company gets bankrupt.
If the company you are invested in gets bankrupt and has to shutdown, the value of your stock plummets. The share price of the stock would head down to zero, though not necessarily instantly. You could lose most of your investment if not all of it.
This is why it is advisable for an investor especially the newbie and those who cannot monitor the market regularly to select stocks of big and stable companies.
2. Stock is sold at a lower or at the same buying price.
The stock market is a very volatile environment. Stock share prices go up and down all the time due to constant buying and selling. But who wants to sell their stock at a loss? Definitely no one. Unfortunately there are lots of instances where an investor must do so.
When an investor runs out of money or needs money immediately due to a financial emergency he has no choice but to sell his stock even when the price per share is low. When a company is not earning, not growing or not performing as expected, there will be more selling than buying of its stock resulting to drop in its share price. Unless an investor has a long term horizon, has strong belief and conviction that company the will recover and perform very well in the future, the investor sells the stock to stop further losses. Bad economy affects the prices of stocks too, may it be local, regional or global. Disturbing news surely makes people worry or panic results to a plunge in stock prices. Investors again try to cut losses, by dumping their stocks.
If shares of a stock are sold at the same buying price, investors also lose from transaction fees such as broker commission, value added tax, PSE transaction fee and SCCP fee. An additional sales tax is charged when selling.
3. Stock is not appreciating.
When the stock’s value is not appreciating, your money is not growing. It will be losing its value due to inflation. Prices of commodities are rising so what your money can buy now may not be enough to buy the same items in the future. However, if you see a promising future for the company and are willing to wait then things could work out for you. Also if cash dividends are paid out often, then keeping the stock might still be a good move.
There’s no doubt that investing in the stock market is very risky. Stories of people who were traumatized from losing their money are heard often. Many even swear never to touch stocks again. However if you are well informed, are in for the long haul and believe that you can ride the ups and downs of the market then there’s nothing to worry about, this type of investment instrument is perfect for you. Besides, despite all the market crashes and recessions, history shows that investing in stocks is still the best and easiest way to accumulate wealth and secure ones financial future. Who doesn’t know Warren Buffet? ^_^
