Can You Lose More Than You Invest in Stocks?

Can You Lose More Than You Invest in Stocks

We’re all trying to find ways to make the most of our money, whether that’s through savings, investments, business plans, or anything else. A lot of people have heard about stock trading and the stock market, but there are a lot of warnings about the possible risks of investing in stocks. One of the biggest concerns people have is whether or not you can lose more money than you invest.

The short answer is yes, you can lose more money than you initially invested in the stock market. However, this is by investing in certain ways and using certain account types. Not everyone who invests in stocks will use this kind of method, so it is possible to avoid these risks altogether. Even if you do use this kind of account, there are ways you can look to mitigate your risks.

Let’s look at how the stock market works, how people lose significant amounts of money on stocks, and how to invest more safely.

Of course, it needs to be said – investing involves risk. All investment types include risks, and the amount you invest could go down as well as up. Do not start investing until you are comfortable that you understand the risks involved. If possible, you should talk to a professional financial expert or an investment expert before you start investing.

Why do people invest in stocks?

The primary reason that people invest in stocks is in the hopes of getting a higher return than they will with savings accounts. It can be hard to find a savings account with more than 2% interest, which is not very much compared to inflation. However, some people manage to get significantly higher return percentages by investing in stocks.

Of course, as we’ve already mentioned, stock values can go down as well as up. It can also be very hard to predict which stocks will go up and which will go down. This means that investing in stocks is never fully safe, though there are some ways to lessen your risk and to pick stocks or investment types that are generally considered somewhat safer.

While a lot of people see stock trading as a way to get rich, it is important to remember that the highest chances of gains are commonly on stocks that are the most volatile and most risky.

Other people invest in the stock market in order to gain a rate of returns that is somewhere above the low investment rates of savings accounts but with lower risk than is involved in seeking out the highest potential returns. A good middle-ground interest rate is often quoted as being around 5% to 10%, though of course this can change hugely depending on the state of the market.

What is the stock market?

The stock market is where people – investors – can buy and sell shares in a wide range of different companies. You can buy shares of any company that is publicly traded. A company’s shares are publicly traded once the owners issue their shares for trading.

How do people invest in stocks and shares?

There are a lot of different ways to access share trading. In the past, members of the public would have had to go through a stock broker, which would mean that a lot of people did not invest. Nowadays, investing in stocks is more readily available through a range of websites and mobile phone apps, which let you manage your stock portfolio yourself. This has meant that a lot more people are investing than ever before.

Of course, this also means that a lot of people are able to invest without necessarily knowing the ins and outs of investing as well as stock brokers to. In theory most stock management apps require people to complete a test before allowing them to invest in stocks by using some of the riskier methods. This is to ensure that people cannot make risks that they are not prepared for, so they can only make informed decisions. However, these tests and checks are very easy to get past, and the majority of people who use stock management apps are able to get access to the more risky forms of investing even if they don’t fully understand the risks. In turn, this means that more people are at risk of losing a lot of money through investments.

If you have been thinking about investing in the stock market, you might have seen some of these apps advertised and they might seem like an easy way to access investment options. This is absolutely the case, but you should make sure that you are fully informed and clued up about investment before you start using these types of apps.

What are stocks?

Stocks are individual shares of a company of corporation. Ownership of the company is split up into however many stocks they wish to sell, and buying a stock means buying a small piece of that company. The value of the stock will go up and down according to how much the companies are valued. Company value is based on how successful the company is. This means that the value of your stocks will be directly related to how popular a company is, how many sales they make, or any new innovations they come up with. Equally, is companies start to lose sales or become less popular, or if major scandals hit the companies, your stock price could easily go down.

What are common stocks?

Common stocks are also called ordinary stocks. These are the usual type of stocks that you are able to buy by accessing the stock market. These types of stocks will be the last to get paid out. Creditors, bond holders, and preferred shareholders all get paid out before holders of common stock do. On the other hand, common stock entitles the owner of the stock to have a voting right over matters of the company, such as new directions the company wants to take. This is usually at one vote per stock owned. However, there are many many thousands of stocks in each company, which means that owning a stock to get a voting right in a company will not get you much. There are also plenty of stocks that are sufficiently expensive that you would only end up buying a percentage of a whole stock.

What are preferred stocks?

A preferred stock is the same basic idea as a common stock. However, a preferred stock does not get you a voting right in company matters. On the other hand, a preferred stock takes priority over a common stock when it comes to a company’s income. This means that owners of a preferred stock will be paid dividends before the owners of a common stock.

What is a cash account for investing?

A cash account is the most common brokerage account type in investing. Generally, a cash account means that you have to pay for all transactions with cash, which you deposit into the account or which you draw out of your bank account. If you are planning to sell shares that are in your cash brokerage account, you can also set an order to buy shares that same day, as the money will hit your account when the trade settles and then immediately be used to buy the new shares you want.

This is generally a safer type of account to have for investment, because it means that you are using money that you already have for your investments, effectively protecting you from losing more than that. Of course, there are still some sizeable risks involved with cash accounts.

What is margin investing?

A margin account is the riskier type of investing account, and so it is usually less common for people to use, at least when they start trading and begin investing. A margin account is where you can borrow money based on the value of the assets you have in this account. This is riskier because it means you could risk losing money that you don’t actually have, money that you have borrowed from the stock broker or broker app. You will also have to pay interest on the amount you have. There are much more risks to using a margin account compared to a cash account. These accounts are often hidden behind knowledge checks in apps to make sure that people cannot use them without knowing what margin accounts are like. However, as mentioned above, these checks are not very thorough. There are also requirements for the Financial Industry Regulatory Authority, where you are required to have a certain amount as still valid as security if you want to borrow more, but this is not always going to stop people from losing money.

What is option trading?

Option trading is a very popular type of investment because it can lead to massive gains very quickly, or it could lead to losses. Options trades require an investor to predict how the value of a certain share will either increase or decrease by a certain point in the future. The option refers to when they set a price and a date to either buy or sell a stock, and they then have the option to follow through with it. Most time people talk about this, they usually have a specific trade in mind. Alternatively, people can use a more balanced approach called a spread to have multiple option trades, which can mitigate the risk somewhat. Nonetheless, options trading is still a risky thing for people to do.

What is short selling vs long selling?

Short selling is a particular type of stock trade with a lot of risks, and it’s important to fully understand it before attempting this type of trade.

Most people think of long selling or long straits when they think of stock trading. Long trades are the standard ‘buy low, sell high’ trade – people aim to buy stock when the prices are low, and then they sell when the stock reaches a higher price. When doing a long trade, people hope that the value will go up.

Short selling is the opposite of this. For a short trade, people hope that the stock drops in value. People do this by borrowing shares for a rather valuable company for a small fee from someone who has the shares. They then sell the shares to someone while the price is quite high. Of course, the complete this trade fully, the trader has to buy back the shares by a later point in time. This is why they hope that the stock drops in value, so they have to spend less than they originally made from selling it.

Short trades are very risky because it can be very hard to predict how the stock’s price will change. If they can buy it at a lower price, great. If they have to buy it at a higher price, then they have lost money. The worst bit about this is that the share price can increase by almost infinite amounts. This means that there is no limit on how much someone can potentially lose with this type of trade.

Can I lose money on stocks?

Absolutely. Stock values can always go down as well as up. You should be aware that people lose money on the stock market every day. The losses can be in tens or hundreds of thousands in a single day, which means that you need to be very careful.

Are all stocks equally risky?

No, not all stock trading is equally risky. Firstly, investing using a cash account is less risky than using a margin account for your trades and investments. There is also a lot of risk in picking individual shares to trade. One company’s value can change drastically, but this means that it could massively drop. If you spread your investments into several different companies, your investment portfolio will be more secure against problems – one loss would not too badly damage the value of your entire investment portfolio.

You could also look into market trackers, which tend to gain and lose value relative to the value of the whole stock market. These are baskets of multiple stocks that you can still buy as one thing. This can again average out risks, as the value and strength of the stock market and economy tend to increase over time. However, this can absolutely still go down – in fact, the who market took a huge crash at the start of the covid-19 pandemic, caused by the number of countries going through economical hardship and the significant drop in the spending power of the average consumer.

Can you lose 100% of a stock?

You can lose almost all the value of a stock or share. It is very unlikely that a stock will drop to absolutely no value left – even penny stocks are still worth something when at their lowest. However, stocks fall to be almost worth nothing, which means that you should lose most of your initial investment. Share prices end if they reach zero, and the stock is no longer traded at that price. There are never negative value shares.

What is the differences between a Roth IRA and buying stocks?

A Roth IRA is a type of savings account that you can choose to have your money put into stocks and shares. However, this is typically managed by someone else with a lot of experience in stock trading. These are usually also focused on lower-risk investments. This means that you will usually have a lower return than on a successful high-risk investment, but you will likely get a lower return percentage as well. Of course, if is important to always remember – less risk does not mean that there is no risk. You can still lose all the money you invest in this type of account. However, you cannot lose more than you invest when using this time of account, which makes this one of the safer ways to have your money earning interest on shares.

Can you lose more than you invest in stocks?

Yes, you can absolutely lose more than you invest in the stock market. This is most commonly the case with margin investing, which lets you invest or buy shared with more money than you actually own, since you are borrowing some of the money from the broker.

This money is in theory held against the value of shares that you already have. This is a similar way to how a mortgage loan will be secured against the house. If you fail to pay off your mortgage payments, your home could be repossessed to cover the remaining balance on your mortgage. However, shares are typically not as stable an asset as property. Stock market volatility means that you could end up with shares that are not worth the initial amount you borrowed.

This is where the problems come in. Say that you borrowed money in order to invest. That investment goes down in value. You still have to pay back the amount you borrowed. You could do this by selling some of your other shares. However, if these also go down in value, you might struggle to pay back the broker that you borrowed money from – and this does not even include having to pay the interest, which would also be added whether your stock prices go up or down.

Can you ever owe money on stocks?

Yes, you can owe money on shares. This is the case with margin accounts, as mentioned above. It also happens when you use borrowed shares to complete a short trade. You have to buy these back to settle your loan even if that means you lose money.

You cannot owe money when you buy shares using a standard cash brokerage account. Once you buy the shares, that is it. If they drop you lose money, but you know the maximum loss up front – that is, the amount you paid for the share in the first place.

What if I’ve borrowed money to invest?

Just like any other time when you are borrowing money, if you use a loan to purchase stocks, you can lose that money and still have to pay it back. Borrowing money to purchase stock options is a huge risk, whether you do it with a margin account or whether you do it with a bank loan, an overdraft, or by borrowing money from friends and family.

Can you lose more than you invest on Robinhood and other investment apps?

Yes. Investment apps are no safer than any other kind of investment. You can still open margin accounts and you can still do short sales, both of which mean you can lose more money than you invest. While these apps make it much easier for people to access financial markets, you should still get proper investment advice before using them.

What was a Robinhood margin account scandal?

One of the most dramatic example recently of people losing more money than they invest in the stock market came about when someone used an investment app to open a margin account. Because of how these apps work without full broker oversight, a beginner investor was able to get invest tends of thousands of dollars in an option trade where he hoped the value of the shares would drop. Instead they rose. This, combined with the amount he borrowed, meant that he had ended up in debt far beyond the amount he had invested. Apps have since changed in order to prevent this type of issue, but it is very important to get advice and make sure you fully understand what you are doing when you start investing.

How do I limit my risks of losing money?

So, how can someone make sure that they don’t lose too much money? There are some simple steps to help keep you safe.

Don’t try margin investing or short selling

The simplest advice is to make sure that you never try an investment strategy that you aren’t yet ready for. Trying margin trading can be very risky, as can short selling. You should stick to brokerage accounts that let you complete simple cash trades if you are at all unsure.

Don’t use borrowed money for investing

You should also aim to only buy stocks with your own money. While it can be tempting to borrow money if you think you are onto a sure thing, you don’t want to end up owing money is the total value of your stock falls. You should also consider your personal finance and your personal risk tolerance – that is, think about how much you can risk losing. Do not invest more cash than you are comfortable risking – this way you will not lose money that you need for your retirement accounts or for mortgage payments.

Seek expert advice

Of course, the biggest and most important advice is to get advice before you start investing. You should always get advice from someone outside the brokerage firm you intend to use in order to make sure they are impartial. Also, make sure that the person you turn to for advice is fully qualified. There are plenty of people offering advice online, but the vast majority of these people may not be fully trained and knowledgeable in the stock market. Getting advice from a professional can make sure you know everything about how to purchase securities, individual stock options, and the different approaches needed by private investors and retail investors. You should absolutely talk to a professional before you try margin investing, as this is one of the riskiest types of trading.

Don’t try get-rich-quick schemes

If it seems too good to be true, it probably is. While trading shares can be a good way to improve your personal finance options and savings, it is not a get-rich-quick scheme. Anyone that claims you can get huge sums of money quickly is probably mistaken or is lying. While investing safely in the market might not get you into a million-dollar home within a year, it’s always best to aim for realistic goals rather than risk losing everything.

Is there any way to predict stock price?

No. There is no reliable way to predict the exact values of stocks. Many investors try to predict how the market will move, and there are some ways to see a general trend, but it is impossible to accurately predict the exact movements. Even past performance cannot be a perfect indicator for future results – plenty of stocks have been soaring in value for years, only for the same stock to drop massively. Some stocks have sat at very low prices, only to rise tremendously, and then drop again.

Roundup

So, can you lose more than you invest in stocks? Yes. Investing is risky, and you should always be careful and try to avoid losing money. Cash accounts let you only invest your own cash, which means that you can only lose the account value as your maximum risk.

The risks increase dramatically when you try things such as margin investing, where you will owe interest and have to pay back the money you have borrowed, even if you lose it all. Short sales are also very risky. Both of these should only be attempted if you know what you are doing.

While trading on the share market can be tempting, people lose money on it every day. Make sure to protect yourself to avoid losing money that you can’t risk. Even if you need money desperately, there are other ways that are much safer to help get the funds you need without risking going into debt.

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