How to Lose Money in the Stock Market

Many people will tell you how to make money trading stocks. However, very few people will tell you how to lose it. This is because not many people want to lose money. But, it's also true that we often learn far more from our failures than we do from our successes. So I'm here to tell you all I know about losing money in the stock market. And hopefully, you don't make the same mistakes I made.

Be aware, everyone thinks they've got a trick for making money in the stock market. A lot of times, that secret is just their way to make money from you. Another thing, data shows that very few people are good at making money in the stock market. In fact, even most professionals lose money. The best thing you can do is buy an index fund and leave it be. Those people who call themselves traders? Almost universally, they do poorly.

So keep this in mind. Most of us are bad at investing. There are many losers.

It's true. I'm not afraid to admit it. The money I have put in the stock market that I have also tried to manage myself has largely disappeared. Most of that money vanished when the Internet bubble burst in the late 1990's. I put a little bit more back into the markets and built up a very small (and I mean very small) portfolio. I followed a few guidelines and was quite proud of myself. Then recently, I got greedy again and watched all my hard work go up in smoke. That's one of the scary things about the stock market. You can do all the right things for years and years, then make one big mistake and POOF!, it's all gone.

One way to make your money disappear is to invest in companies with poor fundamentals. What do I mean by poor fundamentals? I mean companies that are heavily in debt. That's one bad fundamental. Not generating a lot of revenue is another. These are all things you can research. This was the main lesson when the Internet bubble burst. Tons and tons of companies were severely overvalued. People were investing on potential. People were looking for that next Microsoft or that next Amazon. They threw their money wherever they could. It eventually caught up to most of us.

During my most recent investment foray I did a smart thing by putting money into the market after one of its most recent big dips. You have to have a certain amount of fortitude to do this. That's because it's hard to do so when the market is going down. I also used a Microsoft Money link that provides a list of highly rated stocks and invested in those exclusively. I did quite well for awhile. If a stock went up, I'd take my gains and invest in another highly rated stock.

I recently lost about 75% of my portfolio when I got greedy. I got an email telling me about the great potential of CXLT, an internet stock. I invested a small amount of money and watched the stock shoot up 300%, so I kept on investing. Needless to say, the stock plummeted. I also invested in some other recommendations via email and watched them all plummet. These recommendations came from various penny stock newsletters that are available online. Just do a search on penny stocks and you'll find them. So here's a quick piece of advice. If you want to lose all your money, invest in penny stocks.

I failed to follow this simple guideline. Generally in life, if things are too good to be true, they usually are. Web sites promising to give you guaranteed stock picks or claiming to do this or that are usually not what they say they are. In fact, the newsletters I used even said this in the fine print. They were paid advertisements, most likely from the companies the newsletter recommended. See, penny stocks can be manipulated easily.

So if you're an executive for one of these companies or a trader with a lot of money, you can force the value up in a not very short amount of time. Unfortunately, there may not be much of a market out there for any particular penny stock. So why not create one? This is precisely what these newsletters do. If you're a stock holder who would like to get rid of a lot of stock, what better way to do so than create your own market?

One of the things I really wish I had done was set profit goals. I also wish I had set loss tolerances to sell as well. In other words, if a stock gains 20%, you sell and take your profits. If a stock loses 20%, you sell and take your losses and move on. If I had done this, I would have a lot more money today than I have. There really are very few stocks like Google or Microsoft that just seem to go up and up and up. Most go up and down and more go way down than go way up.

One good way to set a stop loss or gain is to sell half the stock. Do this particularly when it goes up. So, if you have 100 shares and it increases 20%, sell half. That way, if it keeps going up, you can feel good about making profit.

So now that you know a few ways to lose your money in the stock market, what kind of things have worked? Here are a few things I've done that have actually worked for me:

1. Leave the investing to the experts
2. Invest consistently and over time
3. Diversify, diversify, diversify
4. Invest in good companies
5. Don't day trade

Hopefully, this article gives potential stock market investors with little experience a brief pause. If you don't know what you're doing in the stock market, you might as well buy a bunch of lottery tickets or head off to a casino. Don't roll the dice like I did.