Can investing put you in debt? It can if you are reckless. You can avoid this by only investing money you can afford to lose or don’t need for a decade or so. The easiest way to get in debt when investing is to borrow money and use a lot of leverage to invest with that.
If you simply just put money aside monthly that you won’t be needing for some time, then you are probably fine. Alternative title for this post could be “The fastest way to lose as much money in the stock market as possible.”
The purpose of this post
The purpose of this post is to show you different ways it is possible to lose money in the stock market and that way prevent you from going broke. I’m sure there are several other ways to lose money as well, but these are some examples.
Usage of leverage
Like I mentioned earlier, with leverage, losing money in the stock market becomes much easier. Only a few bad decisions can wipe out your entire account. The more leverage you use, the faster it is possible to lose money.
Let’s say you use leverage of 200. This means that if the price of the stock you leveraged falls by 0,5%, your position hits zero. This can happen in just a matter of seconds. Using leverage without experience and knowledge can be fatal to your investing account.
Another way to put yourself in debt when investing is to borrow money. Even better, borrowing money with high interest like 10% monthly. Combining this with 200x leverage, that can be a recipe for disaster.
After losing all the money when the stock falls 0,5%, you are left with a loan which keeps on growing. With 10% monthly interest that can grow into a nice chunk of debt in a short period of time.
Buying falling knifes
Buying stocks that are falling hard can be a good way to lose money as well. If the stock is falling like a rock, there is probably a reason behind that. Don’t get me wrong, after the stock has fallen, there might be a buying opportunity. However, most of the time there is a reason behind the long fall.
Combining leverage, borrowed money, and falling knives is truly something else. There is a good chance you could lose your money in just a matter of nanoseconds. This can be an even faster way to lose money than playing roulette in a casino. The time it takes the ball to finish its spin can take several seconds. During that amount of time, you can lose a lot more with the combination mentioned before.
Shorting means betting against the stock. Meaning if you short a stock and it falls 1%, you will gain 1% if not using leverage. When shorting, there is basically unlimited losing potential, since they can, at least on paper, rise indefinitely.
This means you can lose more than your initial capital when shorting. Some brokers have automated stop loss, meaning they will close the position when it hits zero. Adding this to the recipe for disaster can put losses into a whole different dimension.
Compared to only taking long positions, where the stock can only go to zero, there is no roof on the price the stock can rise for when shorting. I have a post about how shorting works if you want to read it, you can find it here.
How to avoid from going in debt when investing
Keep these things in mind when investing to minimize your chances of loss. Combining these can be described as the real recipe for disaster. It is probably one of the fastest ways to lose money in the stock market.
- Don’t use leverage unless you are experienced with it.
- Don’t invest money you can’t afford to lose, especially borrowed money.
- Don’t buy falling knifes. If you want to buy them, wait until they have proven to hit the bottom.
- Don’t short unless you know what you are doing.
There are other ways to lose money, such as picking wrong stocks at the wrong time, but if you just keep to that, with money you can afford to lose, you can’t really go into debt.
If you just stick to your regular investment plan of depositing every month a portion of your income, that you won’t be needing for some time, you should not be able to go into debt with investing. I have more investing-related posts; you can read them here.
Hopefully this was helpful to you, have a nice day.
This is not financial or investment advice. This is for educational and entertainment purposes only. Don’t try this at home.