The stock exchange offers several investment opportunities for those who want to monetize their assets. However, it also involves risks. This makes losing money on the stock market relatively common.
The good news is that you can act to avoid these losses. With an action guided by the most relevant aspects when investing, it is possible to protect yourself from certain fluctuations and seek positive results for your portfolio.
Want to know how to act to protect your investments? So find out what causes a person to lose money in the stock market and understand how to avoid this situation!
How do stock market losses work?
The first step in protecting yourself from suffering losses from stocks and other assets on the stock market is to understand how losses occur. For this, the first step is to understand that the stock market is a variable income environment and that it is based on the law of supply and demand.
Therefore, when the buying force is greater than the selling force, the price of an asset tends to rise. In the case of a broader selling force, the tendency is for the price of assets and derivatives to fall.
However, as this movement is not predictable, there is the so-called market risk. After all, the behavior of those who buy and sell shares directly interferes with the trading prices of the assets.
This movement gives rise to the volatility of the stock market. Thus, it becomes larger according to the intensity and frequency of price fluctuations. If the price of a stock goes up and down quickly and very often, the asset is considered more volatile.
Losses, in turn, occur precisely because of volatility. Depending on the characteristics of the operations, the shares are sold for a price below what was paid in the purchase – and that is exactly how the loss occurs.
What drives people to losses?
So far, you know that the stock market has volatility and that it can generate losses. But what differentiates people who profit in the stock market from those who walk out of the trade with less money?
In practice, this happens through the decisions taken and the behavior of the investor. Considering such points, there are factors that can lead to loss more easily. So it is important to know them to know how to avoid them.
See what they are!
Lack of planning
One of the main reasons for having losses is the lack of planning to invest in the stock market. This can happen to someone who starts to learn about the market, gets excited about the chance to make money, and soon makes trades.
In these cases, as decisions do not usually have as much basis, there is a dependence on luck. In addition, the lack of planning can also occur with those who already have a certain level of experience in the market.
This is the case of those who do not have clear strategies to make decisions or are carried away by emotions. In these moments, losing money in stocks can become inevitable because there is no clear action to find and take advantage of opportunities.
Out of profile investment
You have seen that the stock market has more risks. As a result, it is common for the available investments to be more suitable for those with a more tolerant risk profile. In other words, it is necessary to be willing to give up part of the security to achieve greater profitability.
As a result, it is common for the investment to be sought after by moderate or bold investors. However, there are investors who decide to participate in the stock market without considering this characteristic.
In this case, investing outside the profile tends to generate more anxiety and fear with the fluctuations that are natural in this market. As a consequence, an investor can rush and sell at low moments, making losses. Therefore, it is important to have tolerance for these variations.
Belief in false promises
Due to the opportunities generated by the financial market, there are people who take advantage to position themselves as true investment gurus. As a way of attracting attention and obtaining results, it is common for them to make varied promises of profitability.
This can happen, for example, when a particular person or analytics company promises that, by purchasing courses or subscribing to the reports produced by them, you will have a specific profitability. Although information can really help with decisions, there is no way to promise a return on a variable income.
However, ignoring this statement can cause a person to lose money on stocks. After all, by believing in the promises made about operating in the market, one can end up with the losses of a poorly planned operation.
Considering that investor behavior can contribute to losses, it is worth knowing the concept of the herd effect. This is a psychological phenomenon that occurs when a person stops making his own decisions and follows the behavior of a group.
The movement is explained both by an interest in fitting into a milieu and by the belief that many people are less likely to make mistakes together. However, this behavior can be misleading.
In the stock market, the movement can be observed in the rise or fall of a stock. Faced with the devaluation, many investors despair of losses and anticipate selling the asset. As a result, they make a loss that could be reversed later.
A rise, on the other hand, can make a stock more attractive, as it involves market interest. However, buying a stock that is high or already overvalued increases the chances of losses, as the tendency is for it to return to its fair price.
Another behavior that can lead you to lose money on the stock market is excessive ambition. This is what happens, for example, when you find a stock that has attractive growth potential.
In such situations, instead of sticking to the previously defined strategy, ambition can lead you to invest too much in this role, which can generate losses.
The desire to win big and quickly also increases the risk of mistakes. Keep in mind that when expectations are too high, you tend to take too much risk, and this is reflected in your bottom line.
What behaviors to avoid in order not to lose money on the stock market?
From what you’ve seen so far, you know what can make you lose money on the stock market. Now, it is interesting to understand which habits to avoid. By recognizing these harmful behaviors, you can adjust your approach to the market and increase your chances of making a profit.
Not really knowing the market
As the intention is to reduce the risks of suffering losses on the stock market, it is essential to understand how the market works. For example, before buying stocks, you need to know what the risks of the stock market are, how stock analysis works, what the deadlines are, and other issues.
Therefore, the first step is to train yourself about the market. So study terms and operations, find out who the big investors in the stock market are, and understand the trajectory they traced.
Not having a replicable method
Another big flaw to avoid is not having a methodology for choosing the roles and investing in stocks. As much as fundamental analysis is relevant, it is essential to pay attention to criteria that are extremely qualitative.
When the factors evaluated are subjective, they bring in variables that cannot be controlled and tend to make the evaluation difficult. In this scenario, the chances of losses become greater.
In addition, not having a replicable method leaves you more subject to emotions. In practice, it will be more difficult to make objective decisions that help you achieve the desired results.
Bypass risk management
When you don’t consider what risk management is and its importance, the probability of losing money on the stock market becomes greater. After all, this tool is essential for you to take risks in line with your profile and know how to make decisions.
Therefore, it is worth knowing the risks and defining which ones you are willing to take. From that point on, it is possible to use strategies that help to dilute these risks — as is the case with long-term investment, which reduces the impact of volatility.
Failing to diversify the portfolio
One strategy for managing risk involves diversifying investments. In the stock market, it consists of investing in different assets and from different sectors. It is also possible to have other types of investments in the portfolio, such as fixed income securities.
When you fail to adopt the strategy, you are more likely to suffer from losses on the stock market. On the other hand, when the portfolio is diversified, you avoid the concentration of resources. With this, there are chances of compensating the losses of a security with the performance of the other assets.
How to put together an adequate plan to reduce risks?
As you have seen, not having a plan is one of the main reasons for losing money on the stock market. So it is worth paying attention to this step, allowing the conduct of the entire investment strategy to take place in the best way.
Next, find out how to plan to operate in the stock market with less risk!
Understand your risk tolerance level
Knowing your characteristics as an investor is essential to make financial contributions – especially in the stock market. So start by identifying your investor profile. With this information, it is easier to assess whether the stock exchange is suitable for your reality.
Understanding your profile is also essential to determine what type of strategy is most suitable and what percentage of the portfolio should be allocated to the stock market and other assets.
Know your financial goals
Knowing where you want to go with investments in the stock market is another essential point for your planning. Therefore, you must be careful with the definition of financial goals. Understand how much you expect to earn and how you intend to get the return.
If your intention is to compose passive income, for example, it may make sense to focus on receiving dividends with stocks or real estate investment funds (REIFs). Another point of attention is the deadline. To reduce the risks of losing money on the stock market, it is interesting to focus on the long term.
With this measure, it is possible to reduce the impact of volatility, dilute risks, and guarantee enough time for business development, in the case of shares. In this way, assets can accumulate results over time.
Select a methodology to invest
As it was possible to learn, not having a clear strategy for your investments is one of the behaviors that should be avoided when investing in the stock market. Therefore, it is worth selecting a methodology to make your investments.
If so, you can develop your own methodology. In this case, it is essential to carry out an in-depth study to prove whether the method is valid and to apply it with greater safety. In all cases, the important thing is that the strategy allows you to invest in any situation, in a targeted and objective way.
Keep your emotions under control
As part of planning to invest in the stock market, it is essential to pay attention to your emotions. Investing in a famous company just because many investors talk about it, for example, is not the best way.
Likewise, it is not recommended to give up the entire strategy because the market is in a downtrend. Instead, you need to stay aligned with your goals and approach.
Leaving emotions out of your trading on the stock market is one of the keys to consolidating your planning and avoiding losses. Otherwise, you run the risk of falling into the traps of boundless ambition or herd behavior.
Rebalance your portfolio
Your planning to act on the stock market should also include portfolio rebalancing. As the market can change significantly over time, it is interesting that your portfolio reflects these changes – as long as it is guided.
Instead of making constant changes, set a period to rebalance — at the end of the year, for example. Thus, the results are properly evaluated, while you avoid making very short-term decisions that can be harmful.
With this information, you now know what causes a person to lose money on the stock market. To avoid this result, it is important to focus on planning and on having a solid strategy to compose and maintain your investment portfolio.