Sep 272015
 

A common fear for beginners is “what if I lose all my money?” Well friends, if you lose everything it’s entirely your own fault for betting it all on a single stock! With even a little diversification you’ll never lose ALL your money. You are more likely to lose “a lot” of money. And don’t forget that you haven’t lost a dime until you actually SELL. You can live in denial the rest of your life!

Here are a few creative ways to lose “a lot” of money:

 

1. Short Selling

Short selling is borrowing shares, selling them, and buying more to cover what you borrowed at a future date. It’s used to make money on a falling stock price. Unfortunately stocks tend to go up 70% of the time. If you buy stock, the worst that happens is that the company goes bankrupt and you lose everything. But what happens if you short the stock and the company does exceedingly well? Lets check a quick example:

  1. Short 100 shares at $10 – You put $1000 in your pocket
  2. Company discovers elixir of eternal life, stock price jumps to $100,000/share
  3. To cover those 100 borrowed shares, you now owe $10,000,000 (100 x 100,000)
  4. Total loss -$99,999,000

As you can see the loss is theoretically infinite, instead of only losing your initial investment in the case of stocks. In the case above a good scenario would be the stock dropping to $5 in step 3. You’d get to keep $500.

How to avoid: Don’t short sell. Remember that stocks go up 70% of the time.

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