There's a reason roughly half of Americans aren't invested in stocks. It's not because they aren't fans of higher returns on their money; it's because they're too worried about losing money to take the risk.
And make no mistake about it: The stock market is risky if you don't know what you're doing. So if you're going to invest in it, you'll need to take steps to avoid these blunders that could cause you to hemorrhage cash right before your eyes.
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1. Don't do your research
At some point in time, you might get approached by a so-called friend or neighbor claiming he has a red-hot stock tip. We're talking big, big money, so much so that you can already picture yourself in a giant pit of cash, just counting your greenbacks while rejoicing in your good fortune.
Now that that fantasy is out of the way, let's get real: Things like that don't generally happen. If you follow a random stock tip on a whim, you might get reasonably lucky -- or things might backfire and you lose your money instead. A better bet, therefore, is to do your research before sinking money into something you know nothing about.
Will that take more of an effort on your part? Absolutely. But it's worth putting in the time if doing so helps you avoid losses.
Of course, it's possible to research a stock diligently and still lose money, but if you go in blind, you're increasing your chances of taking that loss. If you're new to buying stocks, you can check out our guide to investing for beginners, which will help you get the basics down pat. You should also educate yourself on how to value stocks, which means getting into the nitty gritty numbers bit as well.
2. Don't diversify
Imagine you do your research and find yourself a seemingly great stock. You sink all of your money into those shares, and then sit back and enjoy months of growth. But then suddenly, out of nowhere, the company issuing that stock falls victim to a major scandal. Maybe its latest blockbuster drug is a total dud. Maybe it's been fudging its earnings. No matter the details, sometimes all it takes is a bit of bad news to send an otherwise solid stock plunging downward. And if you have the bulk of your money in that one stock alone, you may end up having to kiss it goodbye.
That's why diversifying is a much better bet. Rather than load up on a single stock, spread your money around. Invest in different sectors of the market or, better yet, add some index funds to your personal mix. The great thing about index funds is that they give you broad exposure to the market so that you're more protected when individual companies or segments get hit.
3. React to market downturns
February and March were rough months for the stock market, and investors no doubt spent many nights losing sleep over their holdings. But those rough patches are completely normal and to be expected, so if you're going to put money in stocks, you'll need to develop a mechanism of ignoring market downturns so that they don't drive you into episodes of panic.
One easy way to lose money in the stock market is to react to dips and unload your investments the second their values fall and you get scared. When you own stocks and their values decline, you don't actually lose anything until you go out and sell at a loss. And if you sit tight and wait for the market to come back up, which it's likely to do, you won't end up losing a thing. So don't be impulsive, and resist the urge to log in to your accounts and check their balances on a day when the Dow takes a disastrous dive. You're only going to drive yourself crazy and risk making a move that ultimately hurts you financially.
It's easy enough to lose money in the stock market -- that's the bad news. The good news? It's also easy enough to make money on stocks if you know what pitfalls to avoid. If you steer clear of the above, there's a good chance you'll come out a winner.
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