Investing in Stocks – A  Win or Loss?

Last Updated on April 29, 2021

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Investing in Stocks – A  Win or LossAs far as the profit and the loss is concerned, it depends very much on the type of account you use and the trading you do. No matter which method you adopt, investing is always a risk. In saving accounts, federal deposit insurance supports your money, and the value of stocks is left up to the whims of the market.

But in stock investing, there are many possibilities. You may build wealth. You may never earn any money. And you may lose your money. With any investment, there is usually risk associated with it. It is not all candy and rainbows in the stock market.

Is it Possible to Lose More than You Invest in Stocks?

The simple and short answer to this question is yes, you can lose more money than your investment. But again, as said earlier, it is dependent upon the type of account you hold and the type of trading you pursue.

As you know, there are two types of accounts: cash account and margin account. You can lose more than your investment in a cash account, but it is also possible in the margin account. With a margin account, you borrow money from the broker and incur interest on the loan.

If the value of the stock you bought declines, you will lose not only your own money but also the money you borrowed. Moreover, you have to repay that borrowed amount plus interest.

Firstly, being a newbie investor, you would have to determine which type of brokerage account is best suitable for you.

Cash Accounts

The idea of a cash account is pretty simple. It means when you have a cash account, you can trade the amount of money in your account. For example, if you have a thousand dollars in your account, you can buy a thousand shares of a $1 stock. That’s the most you can buy of that stock. That’s called your buying power.

So, if you deposit a thousand dollars in your brokerage account, your buying power is $1000. You can not buy more than that total of a particular stock. It’s great because it keeps you out of the trouble that margin trading can get you into.

It also has a couple of rules. The nice thing with a cash account is you are not susceptible to the pattern day trader rule. If you have a cash account, you are not limited by those three trades in a rolling five-day period like you are with a margin account.

One thing that you should take into consideration is that it does not mean you can freely start day trading because most brokers will have different settlement periods. So, when you are trading that cash, they may not settle your cash for a day, two days, or three days.

Margin Account

Most day traders, good or bad, use margin accounts because it allows several things. Number one, it allows you to buy more stock than you have cash in your account. The other thing it allows you to do is short sell.

You are not limited by the pattern day trader rule with a cash account, but keep this caveat down; you cannot short a stock with a cash account. A margin account is giving you the leverage.

But remember, the margin is a double-sided blade. It cuts both ways. The great thing about margin trading is that if you nail the trade, this is the ideal place for you.

Bottom Line

Yes, you can lose more than you invest in a stock. And it is possible with margin trading.