Rule 1 of investing has always been ‘protect your capital’ – just don’t lose money – but how? How can you avoid losing money especially when using trading platforms?
Today, we’re outlining the 8 best ways to avoid losing money when trading, and they’re going to stay with you or the rest of your investing career and – hopefully – help you make more money while putting less of your hard-earned cash at risk in the stock market!
Intro
The first thing you need to know about trading and investing is that your capital is always at risk. Smart investors understand that their money is at risk with investments, and they look to minimise those risks and maximise their returns.
For most beginners, it’s easier to minimise risk than it is to maximise returns. This is the focus of our article: it is worse to lose any amount of money than it is to make ‘sub-optimal returns’.
With smart choices and a clear, realistic approach to trading, you can keep your risk relatively low while building wealth. Remember that your money is at risk in a bank – even if those risks are small.
So let’s take a look at how to avoid losing money when trading…
Protecting your capital: how to avoid losing money when trading?
Most experienced and successful traders avoid losing money by reducing the unnecessary risk on their portfolios. This comes from personal discipline, market knowledge, and education on the most important principles of stock investing decision-making.
We can’t teach you everything about being a trader – but these 8 lessons are the most important ways to protect your capital. You can begin today and get the benefits of our expert experience!
- Always begin with a trading goal (don’t get greedy/choose your timeline/outcomes)
Step one to avoid losing money when trading is to have a clear goal and investing strategy. Some people have spare cash they want to speculate with (betting on higher-risk, higher-reward strategies), while others are saving for retirement.
These two different ideas of trading will decide which financial products you should focus on. For most people, safer investments are better, because the downside of a bad risky investment could be life-changing (in a bad way) while missing out on profits usually won’t negatively impact your current lifestyle!
Distil your investing goals down as specific as possible, then you’ll know how to invest for it!
- You can always wait: stop getting FOMO!
Impatience is one of the fastest ways to lose lots of money. Patient investors understand that rushing into trades – without proper information or analysis – can lead to terrible losses.
Patience allows a trader to pick winners, understand what they’re investing in, and see great long-term growth. Be willing to wait for the right investments and don’t just spend money because you have it.
You can build long-term wealth and independence for later life if you make and hold investments that you know, understand, and believe in. In the long term, a little research time is a small price to pay for a high-performing, lower-risk stock or financial product.
- Be careful about where you get your stock advice.
How to avoid losing money when trading? Be very selective with your sources of stock information.
Stock advice has a long history of being sketchy – many people have lost money on “hot tips” and “sure things”. Many people have their own product to sell when it comes to investing and trading on social media.
Stock tips from Facebook, Instagram, and TikTok tend to be unreliable – you should always do your own research and treat rumours sceptically. Focus on qualified and reputable sources for all financial information – popular choices include the Financial Times, CFA-qualified finance professionals, and reputable trading platforms like the AAA Trading!
- Understand what you buy and why you’re buying it.
The stock market may be confusing but the most important thing to do is understand your investments, what they are, and why you’re buying them. If you can’t explain why you want to purchase a stock, then you should consider if it’s the right choice.
Many novice investors lose money because they’re focused on charts with no understanding of how the company works.
Before you invest your money, invest your time. Understand the company and its finances, as well as the industry they operate in. This is the absolute minimum, and smart traders will spend more time to try and improve their profits and reduce risk.
- PRICING IN: understand how news and prices work!
Stop listening to rumours about businesses. It seems great to hear about the next big thing from a friend or respond to a piece of news that affects a stock you’ve had your eye on.
This is a common blunder – and it’s not your fault. The stock market works with many institutional buyers who, 100% of the time, have heard the rumour first and have “priced in” the news.
Basically, the current stock price is usually already adjusted for the rumours and news you’re hearing. People in stock exchanges and hedge funds around the world spend billions of dollars on this kind of intelligence, which means you’re going to be one step behind if you think you can ‘time the market’.
Make good choices based on the qualities, finances, and reputations of companies. Don’t spend too much time trying to react to news faster than the world’s largest financial institutions!
- Set rules for yourself – use ‘rules’ for your stocks
Imagine this scenario: you’ve made 30% in a year on a stock purchase, which is more than you had hoped it would perform. You ask yourself, “but what if it keeps going higher and I never have to work again?!”.
The next week, the stock’s over-hyped price drops – and you’re back to 0% profit. This is more common than you think, because stocks will often increase in price around earnings or other events on the company’s financial calendar, or just a hot piece of news.
Stocks can be volatile because their price depends on what people think they’re worth. Many traders will set “take profit” notes on their accounts that automatically sell at a price or set %, where it may be smarter to sell (in this example), 30% of a position in the stock – they’ll still benefit if the price climbs, but they’re covered against a crash in the price.
A “stop loss” note is the opposite – selling a stock when it falls to a certain price. In the previous example, you could set a stop loss to sell at a 25% profit, keeping your position safe.
These are amazing tools for beginner investors who may not have the chance to touch down with their stocks (multiple times) every day. They also help you set hard rules instead of getting caught up in the hype.
- Stay “wide”
For many new investors, avoiding losing money when trading comes from starting with a foundation of investments that feel very secure. These are reliable, reputable options like S&P 500 Index Funds, whose value tracks with the most valuable 500 companies in the world.
These are considered safer because this is a broad exposure, these companies are typically very stable: they have a clear business model, lots of customers, and high quality financial reporting.
Many investors use these kinds of index funds as a “safe investment” for their long-term trading and will reinvest profits from speculating into these kinds of patient, reliable funds – averaging around 10% growth per year over time.
- Practice
You should start your investing journey with a small amount of money to learn the ups and downs of the market and build experience with the tips we’ve outlined in this article.
Begin today with a small amount of money and start practicing the key skills that keep your money safe and help it grow:
- Analyse stocks
- Learn about the market
- Practice financial analysis
- Look at the broad range of index funds and ETFs
Becoming familiar with the market does take some time, but starting your research and looking at trends now can help you understand market functions and provide context to your investments.
Final Thoughts: How To Avoid Losing Money When Trading
You avoid losing money when trading by making smart choices, protecting your decisions from your emotions, and building a clear strategy based on your investing goals. These things take time and – with practice – you will become clearer on how to invest in your own way.
The lessons we’ve discussed here will require you to take your investments seriously, but they will help reduce the risk of your position and ‘beginner mistakes’ that blunder away your cash.
Protecting your capital is essential, and AAA Trading allows you to build wealth with an educated, diverse, and easy-to-build portfolio. You can get started with your account today or check in with our education resources to build your investment strategy on expert advice.