10 Ways You Can Lose Money in the Stock Market [How to Avoid]

There are hundreds of ways you can make money in the Kenyan stock market. There are also several ways you can lose money.

The problem is, people focus too much on how they are going to cash in quickly and miss out on the potential for loss. As I said before in my article Things you should know before investing in the stock market, there is no 100% guarantee in the stock market.

There are, however, precautions and disciplines you can adopt to these stock market mistakes and boost your ROI.

That said, let’s look at the ten ways you can lose money in the stock market and possible mitigation measures.

1. Not knowing what you are doing

This is THE number one way people lose money on the stock market. The truth is, if you don’t know what you are doing, the chances of making a profit are very slim.

So before you do anything else, read, read, and then re-read some more about investing in the stock market.

2. Chasing trends

When a certain company releases a new product, the stock price usually rises in anticipation of increased earnings from its success. This phenomenon is called chasing trends, and it can lead you to make decisions that benefit others but not yourself.

So don’t buy something simply because everyone else is buying it. You will be the one to pay for it.

3. Giving in to FOMO (Fear Of Missing Out)

This is another phenomenon that leads people to make poor investment decisions. They see everyone else making money, and they want in on it too; so they invest with no real action plan!

Don’t let greed guide you. Instead, focus on finding value in what you are investing in.

4. Investing without a budget

Remember the first rule of personal finance – spend less than you make? Well, this is a good place to start investing in the stock market.

Before you invest in anything, sit down and work out how much money you can afford to lose without jeopardizing your financial security.

5. Investing with no exit strategy

An exit strategy is your plan for selling or disposing of an investment to achieve a specific financial goal, such as making a profit or minimizing losses.

There are two types of exit strategies:

• An emergency exit strategy
• A planned exit strategy

An emergency exit strategy is a plan for quickly selling off investments in response to unexpected market events or other crises, to limit potential losses. This strategy is typically implemented as a precautionary measure and is designed to minimize the impact of sudden market fluctuations.

On the other hand, a planned exit strategy is a predetermined plan for selling off investments over a period of time, with the goal of achieving a specific financial objective, such as funding retirement or paying for a major expense. This strategy has a longer-term perspective based on a carefully considered investment plan. The goal is to gradually divest from certain investments or asset classes to balance risk and maximize returns.

You should always have an emergency exit strategy before you make an investment. Otherwise, you could lose everything at once. Even with a planned exit strategy, you will probably want to sell some shares first and others later. After all, no one wants to sell a winning investment.

6. Investing in the short term

Yes, there are good short-term investments that yield a lot of money, but the stock market is not the place to go for quick wins. When you invest in a share or a business, you should be thinking about it as if you’re going to hold onto it forever because chances are that’s exactly what you’re going to have to do.

Investing is like a marathon and not a sprint. If you want to win the race (make lots of money), you must be prepared to run for years without stopping.

Most people blow their load after the first five months, and that’s why they end up back at square one with nothing but an empty wallet.

7. Investing without a plan

Whether it’s a spreadsheet, a notebook, or a great big wall covered in post-it notes, you must have a written-down plan for your investments.

And I’m not just talking about picking the name of a business and putting some money into it.

You should know:

• How much are you going to invest
• Why are you investing it
• How much time you are giving yourself for the investment to mature and
• What you’re going to do if it goes wrong

Saying that ‘if it goes up, I’ll sell’ is not a good plan. If you’ve never invested before, that phrase means nothing because chances are that the first trade will go down.

You need to know how much you are willing to risk, what some of the signs of a downturn are, and how exactly you’re going to deal with one if it occurs.

8. Trusting your stockbroker too much

While stockbrokers can offer valuable advice and assistance in making investment decisions, it’s important to remember that they are ultimately salespeople. They make money by selling you investments, which means they may prioritize their own interests over yours. 

Additionally, brokers may have limited access to certain investment opportunities, which can restrict your options and potentially limit your returns. By relying too heavily on a stockbroker, you may also fail to develop the knowledge and skills necessary to make investment decisions on your own, which can be risky in the long term. 

Ultimately, it’s important to approach investing with a critical eye and do your own research before making any decisions.

9. Believing everything you hear and read

The internet is an amazing thing, but it’s also full of lies, half-truths, and misinformation. There are some people that will tell you that if you just copy what they’re doing, you’ll be as rich as Warren Buffet in no time.

There are others that will swear, on their mother’s lives, that the company they invest in is going to make you richer than Bill Gates.

So don’t believe everything you read and hear. Do your research. Ensure that what you’re investing in has a solid foundation and won’t crumble the second someone shouts ‘fire’.

And don’t just believe one person, even if they are Warren Buffet.

10. Not investing at all

And finally – not investing in anything will likely mean you will end up with nothing. I know it is exciting to join the stock market. You have your CDS account all setup and there is an investment fire burning inside you!

However, for many people, this fire burns out pretty quickly. Before you know it, you have lost interest and never start investing. Not investing means you are not making any profits and leaving money on the table. 

The bottom line

Investing is a great way to make your money work for you, and the stock market is the best place to do it. But like with everything in life, doing what everyone else does will most likely get you exactly where they are; broke and desperate for money.

So open your horizons, research some stocks or shares, and give investing ago. You just might be surprised by how well it works.

Do you know of other ways people can lose money in the stock market? Feel free to drop a comment below.