How Much Can You Lose If You Invest in Stocks?

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The amount an investor can lose when investing in stocks depends on the type of trading and how much was invested, as purchasing a stock only risks the amount that was invested while shorting stocks risks much more. Understand the risks of buying stocks with investing advice from a certified financial planner in this free video on personal finance.

Part of the Video Series: Investing Information
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Video Transcript

Today, we're going to address the question: How much can you lose by investing in stocks? Well, there's a couple different answers to that. The first one is if you want to take a risk, you can actually short stocks, which means that you are borrowing stocks and betting that the price will decrease. For example, if you short 100 shares at 50 dollars a share, you're betting that the price of those stocks will decrease and go below 50 dollars. Then when you close the account and, let's say, the price goes to zero and you close the account out and surrender the shares, if the price has gone to zero, you don't owe any money to anyone, and you've made 50 dollars a share. However, if the price goes up, you risk owing lots and lots of money because if you borrowed the shares at 50 dollars a share and the price went to 100 dollars a share, when you return the stocks, you're going to owe 200 dollars minus 50 dollars. You're going to owe 150 dollars per share, so you can lose a lot more than you initially invest. On the other hand, if you invest in stocks and purchase a stock for 50 dollars a share just on the regular market, if that stock price goes to zero, that's as low as it can go. So the most you can lose is what you originally paid for the stock. You may want to consider leaving the shorting to the experts, and even then, be careful what you short.

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