The Top 10 Reasons People Lose Money When Investing and Trading

Updated: May 31, 2024 | Published: May 31, 2024
Verified Investing
By Verified Investing
The Top 10 Reasons People Lose Money When Investing and Trading

Popular media leads you to believe that making money in the stock market is easy. Business websites regularly hype stories of people who made it rich simply by doing X or Y. So, why isn’t everyone making money in the stock market?

The simple answer is, “It isn’t that easy.” These are the top ten reasons people lose money when investing or trading. These mistakes aren’t limited to the stock market; they can also affect bonds, commodities, and forex trading.

1: Not Having A Trading Strategy

The top reason people lose money when investing or trading is that they need a plan. You need to determine the what, when, how, and why you invest. Writing down your investment strategy will highlight points or problems you might be mentally glossing over. A written strategy also gives you a touchstone of your original goals and considerations.

  1. Your goals: What will you use the money for? Retirement? Buying a house? Putting a child (or yourself) through college?
  2. What is your time horizon? Forever? Until retirement? When do you plan to close out your investments?
  3. What sort of assets will you invest in? Stocks? Large-cap or small-cap? What sector? Index funds? Managed funds? Precious metals? Bonds? How much will you allocate to each investment?

2: Having The Wrong Trading Strategy

Having the wrong trading strategy may do more harm than not having one at all. Just because a particular plan is popular or promises “guaranteed results” doesn’t mean it meets your goals or risk tolerance or fits the time you can devote to trading. A fast-paced plan that has you quickly trading in and out of stocks will not be suitable for someone with a 9 to 5 job, and a low-risk, value-oriented portfolio won’t provide the return on investment an active trader seeks.

3: Poor Risk Management

Another reason people lose money investing or trading is poor risk management. You need to decide your risk tolerance from the start. How much risk are you willing to take, both short-term and long-term? How much can you afford to lose, materially and psychologically? What circumstances would induce you to sell? How would you react to a market crash?

These are all important questions. Make a plan ahead of time that answers these questions and commit to it when the time comes.

4:Trying to Get Rich Quick

A common reason people lose money in the stock market is believing they can get rich quickly. This usually involves playing penny stocks, buying risky investments, and chasing out-sized returns with little thought of the bigger picture. (Meme stocks come to mind.) Investors are often dazzled by the stories of millionaire day traders without realizing the tremendous amount of self-education, experience, and mental toughness required.

The boring reality is that most people will get rich in the market through intelligent investing and holding their investments over time.

5: No Discipline

Undisciplined trading is another surefire way to lose money in the market. Relying on “Free Hot Tips,” online chatter, or the guy on AM talk radio for advice on your investment decisions rarely works. Successful long-term investors make an informed trading strategy and stick to it.

Grabbing random stocks that catch your attention without researching the company is not the road to riches. The undisciplined trader might occasionally make a good random bet but always loses in the end.

6: No Patience

Impatient trading is another common way to lose money when investing or trading. Similar to the “get rich quick” mindset, dumping a position because it didn’t provide immediate results is a waste of time and money. Most investors would benefit more by extending their time horizon before judging an asset's performance.

Note that this is different than exiting a trade where the fundamentals have changed. For example, after COVID restrictions ended, some “pandemic darling” companies lost most (or practically all) of their business. Anticipating that and selling early would have been the right call.

7: Emotional Trading

Emotional trading is often described with the joke “Buy high, sell low,” but it can have a devastating effect on your investments. Succumbing to FOMO (Fear Of Missing Out) is a trap that ensnares millions of investors every time a hot stock makes the headlines. Buying a stock in the middle of a bubble is often fueled more by the “greater fool” theory than by facts. The rationalization is, "I may be a fool for getting into this stock so late, but I can still unload it for a profit onto a bigger fool later.”

On the other end of the “fear and greed” continuum is panic selling an otherwise good asset during a market crash. It’s hard not to react when everywhere you turn, people are urging you to “sell everything before it’s too late!” The facts paint a different picture, for the long-term investor at least. A market correction or even a crash can be a “good stocks on sale” event for the buy-and-hold investor.

A good way to eliminate emotional trading is to set aside a small amount of “fun money” that you don’t mind losing and gamble on longshot stocks.

8: Overtrading

Everything we have covered so far plays into another common way for investors to lose money: overtrading. Overtrading is the excessive buying and selling of stocks over a short period. This mistake has become much easier since the advent of online brokerages. Regularly jumping into and out of trades increases risk and often results in losses. Overtrading can have tax implications, as short-term capital gains add up on transactions.

9: Using Margin Trading

Margin trading is one way for the inexperienced investor to lose far more money than they invest. Unlike regular trading, where losses are capped at the purchase price of the asset, margin trading can cost you far more than you might think possible.

Margin trading involves borrowing money from your broker to buy more stock than you could otherwise afford. If your bet pays off, you make more money trading on margin than you would have without.

However, the downside of margin trading is that losses are magnified as much as gains. You are still on the hook for the entire amount of the margin loan, no matter how far the price of the purchased stock falls. Even if the stock falls to zero, the broker will demand the loan be paid in full, plus fees and interest.

10: Lack of Knowledge

The most important and yet most preventable way people lose money when investing or trading is the lack of knowledge or understanding of the market or their investments. Investors who do not understand basic investment principles are at an unnecessary disadvantage when developing an overall investment strategy.

Anyone can benefit from an education in investing. Whether it’s learning the basics for the first time or enhancing and expanding your fundamental and technical knowledge, courses like Gareth Soloway’s “Winning Trader” series equip serious investors, both new and seasoned, with the information and strategies to master today's markets.