2 Ways to Lose All Your Money in the Stock Market

These dangerous investment strategies can lead to a permanent and complete loss of capital.

Investing in stocks is one of the best ways to build lasting, long-term wealth. Cases can be made for achieving wealth through real estate or the creation and ownership of private businesses, but few asset classes have a track record of wealth creation as solid as public stock ownership, especially on a real (inflation-adjusted) basis.

Data From Ibbotson Associates Dating Back To


That said, investing can be wrought with peril if care isn’t taken to avoid the most dangerous aspects of the market, including the two below.

Penny stocks

The allure of penny stocks has been felt by many an investor, particularly those who are just beginning their investing journeys. Who wouldn’t be tempted by the possibility of earning multiple times your money if a stock can only approach $1 per share — especially when the downside appears so limited?

How much further could a stock fall if it’s already trading for just a few cents per share? The answer — unfortunately for many wounded penny-stock investors — is $0. That’s because, while a penny stock may appear inexpensive because of its low per-share price, the businesses they represent are often of poor quality. In turn, many go bankrupt, which can lead to a complete, 100% loss of capital for investors.

Worse still, the penny-stock realm is an opaque world filled with fraudsters and scam artists. Pump-and-dump schemes are prevalent, whereby hucksters artificially ramp up a stock’s price through shady email and direct-mail promotional campaigns that make dubious claims about the business, and even via illegal practices such as spreading false rumors. Then, as the penny-stock’s price surges as a result of these actions, the pumpers unload their shares into unsuspecting investors’ hands, who often suffer gruesome losses as the stock plummets to its original price level — and sometimes much lower.

For these reasons, penny stocks can be hazardous to your wealth. The prudent move for the great majority of investors is to simply steer clear of them.

Using margin

Buying stocks on margin allows investors to purchase more shares than they otherwise could have if they paid for those stocks in full with cash. By borrowing money from their brokerages, investors are able to leverage their investment capital.

There are, of course, costs associated with the use of margin. Brokerages charge interest on the borrowed funds, so investors need to earn returns above the cost of this interest to generate a profit.

More dangerous is the fact that leverage is a double-edged sword. While it’s true that investors can magnify their gains by using margin when their stocks are rising in value, the reverse is also true. For example, investors using 50% margin — e.g. depositing $10,000 in a margin account to purchase $20,000 worth of stocks — obtain two times leverage on their investments. But these same investors would be completely wiped out if the stocks in their portfolios fell by 50% in value — something that occurred to many stocks just a few years ago during the financial crisis.

Worse still is that, even if stocks rebound prior to these investors suffering a total loss, many won’t have the opportunity to hold onto their stocks to benefit from the recovery. That’s because there are maintenance margin requirements that demand investors maintain adequate collateral to support their margin loans.

If investors cannot contribute additional funds to satisfy these requirements when their stocks decline below certain levels, brokerages will sell their shares in order to meet the maintenance requirements. In this way, investors who use margin are often forced to sell at the worst possible times — when their individual stocks are at their lows and during the depths of overall market declines.

All told, the dangers of margin may be best explained by the words of legendary investor Warren Buffett:

Stay away from leverage. A long, long time ago a friend said to me about leverage, ‘If you’re smart you don’t need it. If you’re dumb you got no business using it.’

Sage advice, indeed.

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Drew Limsky

Drew Limsky



Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.