Are Investments Making You Poor?

If you choose an investment at the wrong time, are driven by greed or overinvest, it can lead to financial losses

While investments are necessary for wealth creation, one has to be careful when making such decisions. Some investment avenues may seem promising, but can actually result in losses. Let us try to understand how investments can make you poor, so that you can avoid such costly mistakes.

Penny stocks – As these are quite cheap, often priced below Rs 10, one could be tempted to buy these in large quantities. Many people treat penny stocks as low risk, high profit investment options. Speculative news stories about such stocks could be shared in the media, which can prompt many people to take risky bets. However, there is a high chance that the value of penny stocks may not change much for several years. It is also possible that penny stocks may further fall in their valuation. In such cases, your investment will be stuck for years and result in losses.

Cryptocurrencies – As valuation of cryptocurrencies is not backed by any real asset, high volatility is often seen. Some investors may see this as an opportunity. But if you invest in cryptocurrencies without proper research, it can lead to losses. Valuation of cryptocurrencies is not regulated by any government body. As such, there is potential for scams and speculative activity by specific groups. Cryptocurrencies can give handsome returns, but they can also make you poor if you are not careful.

Commodities – Many people invest in commodities thinking that it can work as a safeguard against inflation. While the strategy may work, one also has to consider the possibility of wild price swings. This can be caused due to various factors such as market speculation, extreme weather events, geopolitical developments, etc. Unless you have a deep understanding of futures contracts or exchange-traded products, investment in commodities can lead to losses.

Borrowing to invest – Aiming to book big profits, many people take loans to invest. This is often done at times when the markets may be performing above expectations. However, markets are highly unpredictable and can plunge without warning. For example, let us assume you take a Rs 10,000 loan to invest in stock A. You may be thinking that the stock price will increase. But in case the stock price falls, say by 20%, you will lose that much. You will essentially be left with both loss and debt.

Day trading – While it may seem like an easy way to make money, day trading is challenging even for professionals. Large investment firms use advanced software and thorough research to time their buy and sell transactions. Achieving something similar is quite difficult for an average investor. Moreover, the transaction costs are an additional burden. If your day trading activities are driven purely by greed, it can lead to losses.

As is evident from above, certain investments can potentially make you poor. Please note that you are not being discouraged. Just be careful, so that you understand the risks involved. Start with small amounts initially, so that you can get practical experience and limit your losses.