Investing in the stock market isn't always easy, but it is one of the most effective ways to build long-term wealth. With the right strategy, it's possible to make hundreds of thousands of dollars or more in the stock market.
With a less-than-ideal strategy, though, you could potentially lose everything you invest. While everyone may have a slightly different approach to investing, there are a few strategies that are riskier than you might think.
1. Investing in penny stocks
A penny stock is a low-priced stock from a smaller company, and they typically trade for under $5 per share. Their low price can make them appealing to investors on a budget, but there are several dangers involved in this type of investment.
For one, the companies behind penny stocks are often small organizations that may not have a long history. They also may not have much (or any) publicly available information, which can make it difficult to research these stocks and determine whether they're solid investments.
Penny stocks can also be extremely volatile, experiencing significant price shifts day to day. In addition, there often aren't as many buyers available with this type of investment. That means if the price starts to drop, you may not be able to sell your stocks right away -- which could result in substantial losses.
Where to invest instead: Fractional shares can be a smart alternative to penny stocks. With fractional shares, you're buying a small slice of a single share of stock for as little as $1. This way, you can still invest in big-name stocks without the hefty price tag -- and avoid the risk of penny stocks.
2. Putting all your money behind a single investment
Some stocks can experience explosive growth, and it's tempting to think about how much money you could make if you put every dollar behind that investment.
In hindsight, it's easy to look back on a stock's performance and wish you had invested everything. In the moment, though, it's impossible to know for certain where any stock is headed.
Strong companies are more likely to see consistent growth over time, but that doesn't mean they'll never fail. If you put all your money behind a single stock and that company doesn't survive, you could lose your entire investment.
What to do instead: A safer option, then, is to diversify your portfolio. Most experts recommend investing in at least 25 to 30 different stocks from a variety of industries. Then if one or two stocks (or even an entire sector) don't perform well, it won't wreak havoc on your entire portfolio.
3. Trying to time the market
Timing the market involves buying and selling your stocks at just the right moment to limit the impact of downturns or crashes.
In theory, this strategy makes sense. If you sell your investments just before a market crash and then reinvest when stock prices are at rock bottom, you could make a hefty profit. However, the stock market can be unpredictable, and nobody (even the experts) can say exactly how it will perform in the near term. If your timing is off, you could potentially lose a lot of money.
Say, for example, you believe a downturn is looming, so you sell your stocks now. If the market doesn't crash and instead continues surging, you'll miss out on those gains. Then if you invest again, prices are now higher and you're paying a premium for the same stocks you just sold.
On the other hand, if the market crashes abruptly and you sell your stocks too late, you could end up selling your stocks for less than you paid for them, locking in your losses.
What to do instead: Rather than trying to time the market, it's often better to simply hold your investments for the long term. Your portfolio may take a hit during market downturns, but as long as you hold your stocks and don't sell, your investments will likely rebound once the market recovers.
The stock market can be intimidating, but it's easier than you might think to make money investing. By avoiding these risky strategies, you'll be on your way to building wealth in the stock market.