5 Ways to Limit Your Losses When Playing the Market

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Image by: Rafael Matsugana
By George Lamb

With investing comes the inevitable losses that plague our bank accounts. It’s a tough pill to swallow, and any entrepreneur who is seasoned in this particular trade will express the commitment that is necessary when deciding to play the stocks. Yes commitment is indeed important, but another thing that is just as crucial to coming out on top is smarts.

Investing can be looked at in the same light as gambling. But one thing that is clearly distinguishable from that is the fact that you have much more control over the outcome of your investment depending on how much research you do and how skilled your eyes are at picking winning investments.

Of course, though, no matter how skilled or knowledgeable you are, losses will always come. If you are prepared for these unfortunate occurrences beforehand, then your platform should remain high and steady. So in case you’re a newbie, or just need a few tips about how to keep your wallet full, here are 5 ways to limit your losses when playing the market.

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#1) Don’t Give Up on a Stock Too Soon

As stated above, Investing in a stock is a commitment, most of the times long-term. Your immediate instinct might be to give up on an investment you made the moment you see the numbers declining, but keep in mind that many stocks take any wear from 3 to 5 years to bear fruit.

Remember that the reason you invested in that particular stock in the first place was because you made the decision to do so, and just because you didn’t see any immediate results, doesn’t mean the market won’t catch up with your thinking. Patience and persistence are the key to success in most things in life, and if these are traits you haven’t honed yet, then you may want to consider investing your money into something else.

#2) Factor In Trading Costs

Trading costs is something that is often times overlooked when investing into a stock. There may be commissions to pay, and down the line these same commissions will demand expenses toward taxes–how much will depend on how long you kept the stock before selling it. So before you consider selling a stock, be sure that it rose enough to cover all the taxes, trading costs, and other fees associated. This will ensure that your losses are cut to a minimum, all while giving you a nice profit to add to the record.

#3) Quell Your Emotions

That stock may be infatuating and you may find yourself emotionally attached with the potential earnings you may receive from it, but that doesn’t mean you should completely disregard any short-comings that may plague the company. No matter what the reason, even if yourself or your family was a part of the company or if you inherited the stock, keeping your emotions separate from your decisions.

It may be tough getting rid of that sentimental stock, but when it’s time to sell it, it’s time to sell it. Also, going into a decision with a clear, objective mind will allow you to get a clearer glimpse of the potential outcome.

#4) Admit Defeat

There comes a time in every man’s life where he must admit defeat, whether it be in war, in a fist fight, or even in playing the stocks. If the investment isn’t working out, and you see no signs of progression from the company any time soon, then cutting your losses and moving on will be your best bet. I know I spoke above about not giving up too soon, but as an entrepreneur, you should clearly be able to distinguish the hopeful from the hopeless.

Clinging to a stock with no clear reason hoping desperately the company is going to escape it’s bankruptcy may result in losses, something that I’m assuming you’re trying to avoid.

#5) Stay Diverse

Staying diverse is important because is lowers your risk by spreading your investing dollars and distributing them over asset classes and industries. And by failing to take the time and effort out to diversify your holdings, you would be limiting your capabilities, thus setting you up for huge setbacks. Staying flexible in the way you play will lessen the chances in losing all your money in one fell swoop, and will even out your earnings, giving you much more stability in the market.

Are you an expert investor who managed to shrink your losses down to a manageable size? Tell us all about it in the comments section below!