The Top Ten Fastest Ways to Lose Money in the Stock Market

10. Trading options or forex if you don't know what you are doing. Forget the get-rich books that claim you can easily make millions trading options or forex. This is simply not true, and you need to have an advanced and sophisticated knowledge of the markets to make money this way.

9. Penny stocks. It's fun to buy 20,000 shares of a stock that is trading for pennies. It is fun to imagine the stock trading up to $5 while you are holding a big chunk of the company. There is a reason why penny stocks are penny stocks; the companies are usually involved in highly experimental and unproven technology or they have major problems, and sometimes a combination of both. Penny stocks can be fun if you are fully prepared to lose the money that you invest in them. If not, stay away.

8. Buying because of Cramer. Buying a stock because Jim Cramer recommended that you buy it is NOT a good course of action. Cramer can be right, and Cramer can be wrong. Picking one stock out of many that Cramer has recommended and sinking your money into it WITHOUT researching the stock on your own first is a very bad idea.

7. Buying a stock based on the "Peter Lynch" principles. You walk into a store and note that it's very busy, so you go home and buy the stock. BAD IDEA. This can help you find great ideas, but you also need to examine the fundamentals of the company as well. There are quite a few retailers out there that are losing money hand over fist even though their stores are busy. Research first. Always.

6. Buying a stock cause it "looks cheap." Just because a stock used to trade at $30 and now traded at $3 doesn't make it "cheap." It means that the stock is severely flawed. It means that likely the company has some very real problems that it has to deal with. It means that the company might be spinning towards bankruptcy. It means that the company might be suffering from slipping sales. It can mean a lot of things that would make it not very "cheap."

5. Getting married to a stock. You buy a stock at $10 and it slowly ticks lower. $9. $8. $6. You really like the company, so you are going to hold on and ride it into the ground. Another bad idea. Research stop losses and use them. If a stock hits your stop loss, file for a divorce and fire it out of your portfolio.

4. Buying a stock after earnings. XYZ comes out with earnings after the bell and says that earnings will be stronger than expected. You say to yourself, "Cool, I am going to buy!" Then the next day, the stock plummets and you take a loss. Why? There can be many reasons. Maybe earnings were strong but revenues were soft. Maybe they lost a big customer. Maybe their CFO quit. Maybe their international business is down. Or maybe the earnings were strong, but not quite as wildly strong as expected. There are many reasons why a stock can fall after reporting stronger than expected earnings. Always a bad idea to buy right after an earnings report.

3. Buying a stock without doing Due Diligence. A tip from a friend. An overheard conversation. A recommendation from Cramer. A tout from your boss. Tips are fine, but do you own research BEFORE buying. Buying a stock without doing research of your own, based on a "tip", is always a bad idea.

2. Following the herd. The real money is made by following economic trends and trying to become a contrarian. Everyone is betting on oil rising right now and plowing into oil stocks. They might make a few dollars, but chances are good that they will end up losing. The herd is almost never right. The real money is made identifying the bottom of cycles and putting your money into your idea when you think that the time is right.

1. Spam. Best way to lose money in the stock market? By trading on those ridiculous spam email stock alerts that we all get in our inboxes. You've got people accumulating huge chunks of shares in these worthless companies, looking to unload at the slightest sign of an uptick when you decide that you are going to buy some shares. These are bad news, and you should stay far, far away.

Filed under: Stock Market Education | General Knowledge