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Why Do Some Investments Lose Money?

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By:Apply Now

Why Do Others Make Money?

You get a hot investing tip from a friend or from your broker or other financial advisor, and it sounds sweet. You just can't pass it up, so you invest some of your hard-earned money. A few months later, or a few years later, your "sweet" investment takes a nose dive and you lose a chunk of your hard-earned cash. Or maybe you don't lose anything, but you don't make anything, either. What went wrong?

First of all, most "hot" tips should be passed up by the average investor, who should concentrate on investments with a nice, steady growth pace by investing in proven performers with low fees. Speculation (which is what most "hot" tips are) is for experienced investors who know the ins and outs of investing and who can afford to lose chunks of money if the "sweet" deal turns sour.

Also, speculation is not for your retirement funds or your kids' college fund.

So why do some investments make money and others lose money?

Common Reasons Why Some Investments Make Money

  • The company turns a profit consistently, so they can afford to pay the interest on your bond or the dividends on the stock you bought.

  • The company's performance beats that of its competitors.

  • You invested in a financially strong company that is widely recognized as being a good investment. You're more likely to receive a good price for your stock when you're ready to sell it if the stock is in demand and others want to buy it.

    Common Reasons Why Some Investments Lose Money

    • Consumers don't buy the company's products or services. It doesn't matter if they have great products. If they're not marketed well or they cost too much, sales will suffer.

    • The company can't compete effectively in its industry.

    • The officers of the company mismanage the business, perhaps by fraud or by failing to follow a budget, and their costs exceed their income.

    • The stock doesn't appeal to other investors, so when you sell it, buyers are unwilling to buy it at the price you paid for it.
    • The managers or officers of the company are dishonest and misuse the company's funds. Think Enron. Think Adelphia and WorldCom.
    • You fell for a pitch that was a lie - the company's profits are less than you were told, the contracts that were a "sure thing" never existed, or the financial statements were doctored up.
    • Your financial situation forces you to sell your investment at a time when the market is down.
    • Brokers who sold the stock manipulated the price and then dumped the stock, taking their dishonest profit, and leaving you and other investors holding a worthless or nearly worthless stock.

    Keep in mind, too, that if you're planning to invest in the stock market, you should be planning to keep the investment for at least three years. Don't invest in stocks or mutual funds that you expect to cash out in six months or a year, or even two.

    Stocks and mutual funds are a great investment but volatility in price is not unusual, so if you cash them in at the wrong time, you could lose money even on a strong stock or mutual fund.

    • source:about.com

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