When we talk about the stock market, they are high risks. When we meet most of the investors say, ‘ what if we lose all my money in the stock market’. well, if you fail to make the right choice and wrong suggestion can make you lose all the money in the stock market. I can correlate how I lost all my money in the stock market in my initial days in investing and stocks.
Dreaming of a new car, house, and land, I invested in stocks without any knowledge of investments and stocks. I was convinced by my friend who was also a beginner in investments to buy stocks that were going to be public soon. When the market was down, I lost all the money I had invested and I was totally devastated. After a year that stock came out, it collapsed and went to zero.
What I learned from this was: never to listen to beginners regarding investments. Before investing start learning about investments and the stock market.
Are we going to lose all the money invested? Should we avoid the stock market?
Well, the answer is no. The stock market is down, you may lose your investments. But remember the whole stock market has not come down. For instance, when Russia and Ukraine war began or when the pandemic hit, there was an economic crisis. The stock market was down, but the whole market was never down.
We lose money when we invested in speculative stock just like I did. If you want to gain long-term wealth, avoiding the stock market is not a perfect strategy.
If you are buying speculative stock, there are chances of you losing everything you invested. Instead, if you are buying and holding index funds, no need to fear losing everything.
An index fund is a part of the market. Hence losing everything is not possible. Losing everything in an index fund is possible when there is no business, no government, no office, or no source of funds, which is nearly impossible.
What happens if I lose all my money in the stock market?
When there is a drop in price means there is no return on investment. The investors lose their investment. If you invest only in one company and it goes bankrupt and stops trading, then also you won’t lose more than what you invested. This is because the value of a share will only drop to zero, and the price of a stock will not go into the negative. Investors are not supposed to pay others to take their stocks.
How do you lose all your money in the stock market?
If investors are not able to understand how fluctuating share prices affect their wealth, then they are chances of investors losing money in the stock market. There are chances of you losing money because of the way you traded. When the stock market crashes, the price of the stocks drops by 75%. for example, if you own a company’s 100 shares worth 100$, after a crash in the market the 100 shares’ value will be 25$.
You might be wondering what are the reasons I am losing my money in the stock market. Here are common mistakes we do because of which there is a high risk of losing money. Some of them are here for you.
- The primary way to lose money is when you buy for high and sell for low. You can lose money this way in every possible investment like mutual funds, stocks, options, bonds, ETFs, etc.
- When you buy on margin and face margin call. When investors borrow money from brokers for investments is called margin. There are two scenarios where you can lose money.
- When there is a crash in the stock market: there will be a margin call and you will be unable to repay. Chances are the market will freeze, and you could have difficulty accessing other assets to cover the call. Also, selling the assets in your account can occur at a huge loss.
- When you trade in forex: the market will be open for 24 hrs. Even when you are sleeping the prices may fluctuate. When you are sleeping, you are assets will be sold off. You may wake up to face a margin call.
- Currency Devaluation: this occurs when your country decides to make its currency cheaper than other countries. This is a symbol of economic loss because of poor policies and the effects of market forces. Here investors can lose money because of changes in exchange rates.
- Commissions: this is one of the common reasons why we lose money in the stock market. When you invest money, you will have to pay commissions. Suppose you are investing 10000$, it will cost 14$ for you to trade, then automatically you are investing 9986$.
- When you sell Naked puts: selling naked put means you sell the put without owning the stock. If the price of the stock manages to stay above the strike price, then you are in a safer place. If the price drops below the strike price, then you will have to buy the stock at that price.
We suggest you avoid the above common mistakes to safeguard your investments.
Where does lost money in the stock market go?
The money isn’t going anywhere. If the market value is down by 100$, it is not going anywhere. It has moved out of the stock market and into other assets.
Imagine you have bought a new brand phone for 25000, after 3 months, the price is down by 2000. the price is 23000. your phone value is decreased by 2000. but your 25000 isn’t going anywhere. And no cash has even changed hands at all. When shares of the company are traded, all other shares are traded at the new price.
Conclusion
To summarize, while investing money in the stock learn about the stock market and take wise decisions. There are potential returns and high risks, hence be mindful before investing in the stock market.
Frequently Asked Questions
There is no impact on stock market gains or losses if you own the shares. The gain or loss is equal to the sale minus cost.
Yes. If you borrow money from the broker with a margin account, then you can earn more than it the worth.
The profit on stock can be taxable at 0%, 15%, or 20% if you own the share for more than a year. If you own for less than a year you will be taxed at the ordinary rate.
