Four Easy Ways to Lose Money in the Stock Market

By Mark Reiter, MD, MBA, University of North Carolina

1. Trade small amounts of stock often.

If you buy and sell $1,000 worth of a stock five times in a year, you've already managed to lose over 20% of your investment (ten trades at an average commission of $20). In addition, your broker only carries out a trade if the stock price goes slightly past the price the trade was executed at, and the broker takes this portion as profit. The broker often makes more profit on the "spread" between the "bid" and the "ask" than it does on the trade commission. Try to only trade in blocks of $2,000 or more to minimize the gain needed to cover your transaction costs. In addition, frequent trading increases your exposure to paying taxes on your gains. Trade infrequently and for legitimate reasons, not based on emotion.

2. Buy a stock based on a hot tip.

Sorry to break the news to you, but you and your friends are not "in the know." Any hot tip you get is almost certainly worthless. Perhaps there was something to it, but the "smart money" got the tip way before you and has already capitalized on the opportunity. In the rare circumstance that your buddy actually does have a valid hot tip based on information not available to the public, you're at risk of violating insider-trading laws.

3. Overestimate your knowledge.

Physicians are used to thinking they know more than most people. Physicians considering investing in medically related stocks (pharmaceuticals, medical devices, hospitals, etc.) might know more than most about a company's prospects. However, it's important to realize that Wall Street firms are likely to be more informed about large companies in the medical sector (this does not hold as true for smaller companies), and may have several MDs and PhDs to assist their team of finance professionals on analyzing a medical stock. Furthermore, you may be an expert on the scientific and medical aspects of a medical stock but not possess the financial knowledge, skills, and access to information to appropriately analyze a company's financials, management team, suppliers, customers, competitors, intellectual property, marketing, R&D, legal issues, etc. As a general rule, if you can't understand a balance sheet, income statement, and cash-flow statement, you really shouldn't be investing in individual stocks.

4. Don't invest in the stock market.

Ok, you can't technically lose money by not investing. Still, if you've got the available cash, you're missing out on the opportunity to average over 10% return on your money in the long-term if you keep your money in cash rather than investing in stocks, and that's pretty much the same as losing money. Sure, the stock market can be risky in the short-term, and there are lots of pitfalls. I authored "A Resident's Guide to Money" (www.emra.org/index.cfm?page=670) where you can learn how even rookie investors can safely earn an excellent long-term return investing in the stock market.

Published in December 2003/January 2004 EM Resident

 

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