10 Reasons You're Losing Money in the Stock Market

The stock market has been one of the greatest vehicles for wealth generation in modern history, but that doesn’t mean that every investor makes money in stocks. Naturally, there’s risk involved, and that means the possibility of losing your money. Without that risk, the potential for life-changing returns wouldn’t exist.

If you are losing money in the stock market, it’s generally because of common mistakes. Let’s take a look at 10 of the biggest reasons why investors lose money in the stock market.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Timing the market looks so easy in retrospect. Just look at a stock chart and buy at the bottom and sell at the top. Unfortunately, it’s not so easy to do in real time. How many people knew that the market was hitting bottom on March 23 last year during the coronavirus crash?

Though it may be appealing to do, the problem with trying to time the market is that it can cause you to miss out on big gains or miss an opportunity to buy a stock when it’s cheap. For instance, a stock may look like it’s hit a top, but it could go on to gain another 1,000% from there. On the other hand, you could keep waiting for a stock to go lower and miss a great chance to buy.

Warren Buffett once said he can’t time the market and doesn’t know anyone who can. It’s worth heeding that advice.

ALSO READ: Stop Trying to Time the Market and Do This Instead

This may be the most obvious one, but the easiest way to lose money in the stock market is by buying bad stocks. Over the long term, most stocks will increase in value, but some will lose value. This could be because the business is losing money, the company is in a declining industry, the stock is overvalued, a better competitor comes around, or a number of other reasons.

Similarly, investing in high-risk stocks or penny stocks is an easy way to lose money as those stocks can quickly lose 50% or more of their value.

If you’re consistently chasing outsize returns and losing money, it’s probably a good idea to buy some less risky stocks.

Trading options is one way of adding leverage to your portfolio. You can make huge potential returns by investing a relatively small amount. For sophisticated investors, trading options can sometimes make sense, but most investors are better off avoiding the strategy.

That’s because it’s easy to lose your premium, or what you paid, on options because the value of them declines over time and eventually they expire. Alternatively, if you sell options and bet wrong on the direction of a stock, you can lose a lot of money. For that reason, most investors are better off sticking with stocks.

Like trading options, using margin is another way to add leverage, but it can also come with a steep price. Trading with a margin account simply means borrowing money from your brokerage, generally for a nominal interest rate. Doing so allows you to invest more money, but if your stocks go south, you could end up getting the dreaded margin call. This is when your brokerage forces you to liquidate your holdings in order to pay back the money you borrowed, and it’s an easy way to lose a lot of money in the stock market.

Therefore, you’re better off investing with the cash you have and avoiding margin.

ALSO READ: 4 Mistakes New Investors Should Avoid at All Costs

Commissions aren’t the money suck they once were for investors thanks to the impact of Robinhood, the mobile app-based brokerage that made free commissions the industry norm. Just a few years ago, paying $8 a trade was common.

However, it’s still easy to pay too much in commissions, especially if you’re trading frequently with options, targeting over-the-counter stocks or other less liquid investments that may not be available on every brokerage. Those fees can add up quickly and cut into any profit you would have made.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Over a long enough time frame, the stock market has always gone up. But on a shorter time horizon, you may not be as lucky. For instance, if you had invested at the top of the market in 2000, you would be in the red for the next 14 years.

The boom in the stock market over the last decade is something of an anomaly as the S&P 500 has had only one down year in the last 12, in 2018, so it’s important to remember that you will likely endure a few down years at one point.

If you’re losing money on the stock market, one easy solution is often to just wait longer.

All other things being equal, the fewer stocks you own, the more likely you are to lose money. That’s because you’re exposed to more risk. If you own only one or two stocks, for example, you’re not getting any of the benefits of diversification, which can help smooth out losses and gains in individual sectors and generally deliver positive returns over a long period of time.

The last few months offer a perfect example of this. High-priced growth stocks that performed well during the pandemic have largely pulled back since February. If you only owned these stocks, you’d have lost money in recent months. If you were diversified across the market, you’d have gained both during the pandemic and in the last few months.

ALSO READ: 3 Investing Mistakes That Could Wipe You Out in a Market Crash

One of the easiest ways to lose money in the stock market is to sell when your stock falls because you’re afraid that it will continue to fall. Making emotional decisions based on fear and greed is almost always a bad way to invest. If you’re feeling too emotional about your investments, it’s a good idea to increase your time horizon, adopt a buy-and-hold strategy, and check your portfolio less often. It’s also a good idea to keep a journal or a spreadsheet to remind why you chose to invest in certain stocks.

If your investing thesis is no longer valid, that might be a good reason to sell, but a falling stock price could be a buying opportunity instead, and not the red flag some investors might see it as.

Similar to making emotional decisions, using an investing style that doesn’t suit you could lead to losing money in the stock market. As an investor, you need to understand your goals and needs, as well as what you’re comfortable losing. Growth investing, for example, may sound appealing, but it’s not right for everyone. Some investors may prefer more conservative styles like income investing or value investing, which are generally less risky.

If your investing style conforms with your goals and risk appetite, you’ll be less likely to make mistakes with your investments that cost you money.

Low-cost index funds have been one of the greatest innovations in the stock market, making it easy for any investor to put money in a fund tracking a broad index like the S&P 500 and get charged just a fraction of a percent.

However, some mutual funds and exchange-traded funds (ETFs) have expense ratios as high as 10% to invest in them, meaning you’ll have to pay as much as 10% of your investment to the fund manager. Since it’s hard for even the best fund managers to consistently beat the market, you’re better off investing in a low-cost index fund rather than paying several points for an actively managed fund or a specialized ETF.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Often, the reason investors lose money in the stock market is by making things too complicated. They take on too much risk, invest outside of their knowledge base, or follow others into bad trades.

The easiest way to avoid losing money is to keep it simple. Buy and hold high-quality companies and let the magic of time and compound interest work for you.

Historically, the S&P 500 has returned an average of 9% with dividends reinvested. Though there will be periods when it lags that benchmark, over a long enough time horizon, you can make money in the stock market simply by buying an index fund.

The Motley Fool has a disclosure policy.