I want to believe that the first part of this article gave us the basis of what to consider while journeying on the path of financial freedom. Incase you missed that, read it here .
In this article, I will just write briefly about ways we can lose money as investors. Without much talk and story, I will drive straight to the point.
Trading to learn
Most people are unaware of the fact that you no longer need to use real money to learn how to invest. Thank God for the evolvement of technology, mobile and desktop apps have been created in various forms to teach us how to invest and learn all that pertains to investment via demo trading. This is set up to help us gain all the necessary knowledge needed before we start investing. Armed with only the basic information about markets, some people invest and start trading hoping, ignorantly, that luck will be on their side. Instead of learning how to trade, these investors begin trading to learn how the markets work. This reversed prioritization of events leads to insurmountable losses, making it harder for the trader to ever recoup the lost money.
Understanding the risk level of a trade and the risk category that investments are placed is the first step to avoiding losing money when trading. Conducting a risk assessment of the investment opportunities in the market enables a trader to determine the leverage that they hold against the investment and whether it is worth placing a wager using the leverage. Without a risk assessment, a trader may place a wager on a portfolio that has a high-risk premium and ends up losing the leverage among other losses.
Lack of money management skills, investors hold on their stakes for either too long or release them too fast. Therefore, despite making a profit from a transaction, the newbie investor ends up losing money.
Like any other investment, trading has its operational costs that have to be factored when generating a profit and loss statement. A trader may lose money despite having a positive return in a trading period based on the costs incurred over the period. The adjusted transaction costs deducted include taxes, commissions, and utility bills, among other resources including time spent trading and conducting other activities related to the trade.
Tools of the trade
I wrote about learning the instruments and tools of investing in the first article. Markets are time sensitive and data-intensive platforms. Traders who have appropriate data at the right time are more likely to win than the others in the same market. Lack of tools for efficient data analysis and communication causes some traders to make trade decisions ex-post. For example, having a slow internet may hamper the trader’s efficiency and hence a trader will make decisions using delayed data feed.
Lastly, newbie’s lose money because they lack a trading strategy or if they have one, they deviate from the plan. For example, a new investor without a diversified portfolio is likely to lose money because of lack of risk spreading. Consequently, trading without a limit order or a take-profit order exposes the trader’s positions to further risk of losing money with the hopes of a ‘miracle’ at any time.
So how do we avoid losing money?
With the basic information on how money can be lost, it is paramount that you understand the best way to avoid these predicaments by learning how to become a successful investor. I will advice that this article spurs you to read and learn more on how to be good investors. The knowledge of being a good investor
Samuel writes here
Author: Emmanuel Eneojo Samuel
Eneojo Emmanuel, a computer engineer by training, an educationalist with passion and a writer. I find great advantage in travelling, reading and writing. As humans, at some point in life we can get to a cross road and it’s not uncommon for our lives to be unravelled. Hence, my greatest passion is to use my abilities and writings to bring to the consciousness of people that they have a say over their lives and we do not allow circumstances define who we are. I believe there’s a greatness in everyone.