Common ways to lose on the stock market

StockmarketThe first way that an investor could lose money in the stock and financial markets is simply because of the position that they are in. That is; if you buy a share and the share price falls, you will lose money, if you buy a call option and the share price falls, you will lose money. Nobody can make a profit on every single trade they make- not even Warren Buffet gets all of his trades right.

Making money in the stock market is about balancing profits and losses while at the same time maximizing the profits and minimizing the losses. There is nothing you can do as an individual to make the share price go up, what you can control, however is how much you give back to the market when it goes against you. You can't control what profit you make but you can control what you lose.

The most important strategy to building wealth in the stock market is to keep your losses small. The other common way to lose money is to not know what you are doing. Warren Buffet said it best when he said that derivatives which include options and CFD's are massive destruction. What he meant was when used by educated, informed and intelligent traders; derivatives can be used to build phenomenal wealth in the markets due to the leverage and the risk protection elements of CFD's and options.

However, used by the uneducated, the naive, the uninformed and the just plain greedy, they can absolutely destroy your trading account. If used incorrectly, CFD's can result in a trader losing most if not all of their entire trading capital and potentially even more. I like to think about it like walking across the street. Walking across the street is risky, looking both ways first is risk management, if you go into the options or CFD market without taking the time to look both ways and learn how to protect yourself and your money, then, frankly you deserve to be hit, it might wake you up and realize how important what you are doing is. Once you know what you are doing, you know the risks and more importantly you know how to protect your money and reduce those risks, then trading the financial markets can result in fantastic profits.

Daniel Kertcher features in the book Mr  Millionaire

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