15 Fast Ways to Lose Money in the Stock Market

We all make mistakes, but while some are inconsequential, others can be financially devastating. Here's a quick review of 15 ways you might lose money in the stock market. Try to keep them in mind as you invest in stocks -- but don't let them deter you from investing in stocks, because the stock market is arguably the best way to build long-term wealth.

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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.

Simply jumping into the market -- or adding money to a stock portfolio you've already established -- can be a big mistake, if you're really not ready to be investing in stocks. For example, if you're carrying a lot of debt, especially at high interest rates such as those charged by many credit cards, you'll have trouble getting ahead. That's because the stock market's long-term growth rate is around 10% annually, on average, and even if you somehow earn twice that, you can still lose ground when a credit card is charging you 25% or more in interest. You should also have an emergency fund loaded with at least three to six months' worth of living expenses before you devote money to the stock market.

ALSO READ: How to Handle Credit Card Debt When You're in Too Deep

Another way to lose money in the stock market is if you don't have a good understanding of the companies in which you're invested. For example, does a given technology company make money by developing great products and then making and selling them? Or does it license its technology to other companies to manufacture them? Is its business model capital-intensive, such as retailers with many brick-and-mortar locations and workers, or railroads with costly equipment and upkeep? Or is it a light business model, often preferred by many -- such as companies that hold little inventory or real estate and simply take a cut of online transactions?

A classic way that many people have lost big bucks in the stock market is by day trading. That's when they jump in and out of stocks rapidly, often only owning them for mere minutes -- or less. The idea is that if they can capture a relatively small gain and move on to capture another small gain and do so frequently, they can accumulate a lot of money.

No less an authority than the Securities and Exchange Commission (SEC) has warned investors not to day trade, and it's done so in unambiguous language: "Be prepared to suffer severe financial losses." "Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status." "Don't believe claims of easy profits."

Similarly, parking any dollars into penny stocks -- those trading for less than about $5 per share -- is highly risky and has wiped out gobs of investors. Many naive investors can be lured by penny stocks, because they can buy, say, 3,000 shares for just a few hundred dollars. They assume that a stock with a share price of $0.30 or $3 is a better bargain than a $30 or $300 stock. That's very untrue, though -- many extremely low-priced stocks are more likely to fall further than to rise, while a $30 or $300 stock can be on its way to $600 and then $1,000 and more.

ALSO READ: 3 Popular Robinhood Penny Stocks Worth Watching

Impatience will knock out many investors, too. They'll buy into a very promising company with great expectations, but if it has not grown in value within a few weeks or months, they'll bail out, perhaps moving the money into another promising stock they've heard about. And then the same thing can happen again. It's important to understand that great stocks that can build great value will probably not do so by relentlessly rising. Stocks -- and even the overall market -- tend to rise in value in a jagged line, sometimes slumping or stalling for many months or even a year or more.

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.

Margin -- when you invest with money borrowed from your brokerage -- is another thing to avoid if you don't want to lose money in the stock market. It's not a guaranteed path to ruin, but investing with margin can cost more than you think and not earn you as much as you expected. The appeal of it is that it amplifies your gains. But it amplifies losses, too. And all the time that you're invested with borrowed money, you're paying interest for that privilege -- whether your stocks rise or fall.

Betting against a company by shorting its stock can be another path to a loss of profits. When you short a stock, you (legally) have your brokerage borrow shares of a stock that are then sold for you. You're hoping that the shares will fall in price, at which point you'll buy them and will replace the shares you borrowed. You will have reversed the usual buy low, sell high maxim so that you sell high, buy low. This can work well if you were right about the company you shorted, but understand that many companies do turn themselves around, and their entire management is likely to be working against you. Furthermore, the whole stock market tends to move ever upward over time, despite occasional pullbacks. Only experienced investors should think about shorting any stock, and we all can build lots of wealth without ever engaging in shorting.

ALSO READ: 3 Top Growth Stocks That Are Screaming Buys Right Now

Once you fill a portfolio with a bunch of different stocks, if you're not keeping up with them regularly, you can end up with some unpleasant surprises. At a minimum, with most stocks, you'll want to check out their quarterly and annual reports and, ideally, look up their latest news occasionally, perhaps via an online search engine. An exception would be blue chip stocks in established, slow-to-change industries, such as waste collection.

If you're most psyched and optimistic about a certain market sector, such as pharmaceutical companies or fintech companies, that's great -- but don't invest only in them, or mostly in them. Any sector could experience a big blow that changes things, and then you could see most or all of your portfolio take a big hit. You might diversify your holdings so that you have some large-cap stocks and some small-cap ones, many U.S.-based ones and some international ones, and stocks across a variety of industries. You can also diversify with some bonds or real estate investments, among other things.

There is a lot of groupthink in the stock market. When the stock market is rising and investors are elated, they'll tend to buy more shares, sending it up further. When the market eventually retracts (as it always does, occasionally) many investors panic and sell, causing the market to drop further. Resist the temptation to go with the crowd, because it will only have you buying high and selling low. Do your own thinking. Expect volatility, and if possible, snap up shares of great companies on sale during downturns.

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.

Money can also be lost in the stock market if you're using options without understanding them and their risks very well. As with shorting stock, the vast majority of us can do remarkably well in the stock market without ever going near options. There's a range of ways to invest with options, and some can be very risky. Remember, for starters, that most options are fairly short term, and if the underlying securities don't behave as you hope or expect, the options you bought (or sold) will expire worthless. Depending on what kind of options trading you do, you can potentially face nearly unlimited losses.

ALSO READ: This Is the Hottest Sector in the Stock Market Right Now

For best results when investing, stick with what you know and understand well. That can mean the industry in which you work and/or industries you've studied up on. For example, if you don't understand the biotechnology sphere, you may buy into some risky companies with no drugs on the market and just one or more drugs in development that the companies hope will eventually earn Food and Drug Administration approval. Those companies may turn out to be terrific long-term investments, but alternatively, they may flame out, perhaps running out of cash before getting any drugs approved or even close to approval.

To really understand how healthy a company is financially, and how well it's growing, you'll need to be able to read and understand its financial statements -- its balance sheets, income statements, and statements of cash flow. If you're new to financial statements, they can be confusing and intimidating, but fear not -- they can be mastered.

It's important when investing to pay attention to a stock's valuation. Understand that each stock has an intrinsic value -- what it's really worth based on how much it's earning and how much it's likely to earn in the future. The price the stock is trading for today may be well above or below that intrinsic value, making the stock overvalued or undervalued, respectively. Learn about how to value a stock and aim to buy undervalued ones. Otherwise, you may vastly overpay for some stocks and end up with little to no gains.

ALSO READ: 2 Best Value Stocks to Buy Now

Finally, if all this sounds like too much work to you, if it seems like you'll never be able to avoid all these money-losing blunders, know that you have a wonderful alternative: You can just invest in one or more low-cost index funds that track the performance of the overall market or indexes that reflect large swaths of the market. Index funds even outperform most actively managed stock mutual funds -- choosing them is not waving any kind of white flag.

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.

Try to avoid as many investing mistakes as you can, such as buying penny stocks, day trading, using margin, investing in things you don't understand, and more. Learn about investing and keep learning -- the more you know, the better your long-term portfolio performance is likely to be.

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