You have heard from almost everyone that stocks are dangerous, and you can loose everything on the stock market. That is why you should not invest in the market. Can you REALLY lose everything?? The simple answer is yes. But you have to really try.
I have been an active trader in the stock market for over 15 years. In that time, I have owned over 400 different stocks. I often go over my old holdings to see who is till around, and what their worth. Quite a few are not around anymore, having been bought out by another company, or changed their name, or even because they went bust. Even with all of those dangers, I have only ever lost “Everything on A stock” 6 times. That is .015 % of all of my investments. You loose more than that in a Savings account that pays less interest than the rate of inflation.
There were only two reasons I lost the money. 1) I did not keep an eye on the stock. 2) I did not set a Stop Limit sell order. If you monitor your stocks at least weekly, and you set proper Stop Limits, it is almost impossible to lose EVERYTHING. Now, if you are involved in Short Selling, all bets are off. It is the one of activities where you can actually lose MORE than you actually invested. Just Buying Low and Selling High is challenging enough in my book.
Most of my losses happened early in my investing career. Because I just did not know better, and I dealt mostly with stocks on the Venture Exchange. The most important thing that you can do to protect your investments, is do your research first, then, the day after you bought the stock, set a “Stop Limit” Sell order, and keep an active eye on your investments. The Stop Loss Sell order is your safety net so you don’t have to monitor your holdings as closely. I promote the ACTIVE monitoring of any investment you have!! In my book, that also applies to the Mutual Funds you have someone else manage for you. Except that you can’t place a Stop Limit order on a Mutual Fund. We will talk more about Mutual Funds in another post.
How does a Stop Loss work? Say you buy a stock at $2.95. The next day, before the market opens, place a Stop Loss Order. It will be one of the selections in your trading account sell window. If it is not there, find another trading platform!
You set the Trigger price, (where it has drop to for the order to “Trigger” the sell), then set the Limit price. (the lowest you will sell for.) If it goes below the Limit Price you will not sell. The values you enter will depend on how much the stock swings in a day.
You can change the stop loss as often as you want. (Daily, weekly, etc) If the stock moves up, I would recommend that you move your limit up. Once your limit is higher than what you paid for the stock, then you will make money even if it does sell. This does not stop you from losing money, but you will never loose ALL of it.
THIS DOES NOT MEAN THAT YOU WILL SELL AT THE PEAK PRICE!!! Timing the market is a fool’s game. But the rule of buy low, and sell high works, even if you don’t buy at the lowest price, or, sell at the highest price.
As you can see, I did not buy at the lowest price. But I did buy low. As the price of the stock went up, I raised my Stop Loss threshold. As the chart indicates, I also did not sell it the highest price, but I still made money. Cost to buy $5450.00, Sell price $9400.00 Profit $3560.00. Not bad for only holding for 3½ months. This is one of my real transactions. Note: They all don’t go this well.
Even if the stock had moved in the down direction, the loss would have only been $140.00. That is a long way from loosing ALL of it. It might be worth noting, that not all Stock exchanges will allow the Stop Loss option. The TSX and the Venture will, but I have had problems with CSE. Can you loose everything in the stock market? Yes. But a little knowledge will make sure you don’t loose more than you have to. Now you know how not to loose it ALL.