How Much Money Are You Willing To Lose Today

I've seen it time and time again. Usually once a week, I get asked if there is some great penny stock that they can invest $500 into that will somehow turn into $1 million. If I knew that, believe me, I'd be investing a lot more of my money, my family's money and letting all my friends in on the big secret.

First, if you can only afford to invest $500, sadly, you may have identified some shortcomings in your personal finance situation. The truth of the matter is, a $500 investment in penny stocks, is the exact same thing as going to Las Vegas and playing the slots. You may even find your odds are better there.

While I'm not suggesting that you head to Vegas instead of planning your financial future, the key is to know where you're starting from and where you want to get to. You'll need something more specific than 'I want to be rich'.

Fortunately, a financial adviser can help you there.

What if you have a lot more than $500 to invest? What is your motivation for being in the stock market? Obviously it’s to make money. However, that may actually be the wrong approach to take when you're investing.

That doesn’t seem to make any sense does it? Stick with me for a minute.

Instead of focusing on how much money you want to make investing in the stock market, focus on the amount you are prepared to lose when you're investing.

Now before you decide to move onto the next article, read that question again. It may be the most important statement on your way to becoming rich.

How much money are you prepared to lose investing in the stock market?

Here's why that 1 sentence will help you make more money than you have today.

When we invest in the stock market, we research the company, we look at trading history, we invest time.  Before long, we've made the decision that this company is truly undervalued, and appears to be the best stock pick we can find.

That's called due diligence, and it’s a major factor towards your success. So where does my "lose" factor come in?

Simply: how much money am I prepared to lose before I decide, maybe I missed something. Maybe I invested at the wrong time.

The fear of losing money will actually help you keep money. Here's why.

If you say to yourself that you are prepared to lose $500 on this stock, you have helped set a stop loss for yourself.

Enter in your stop loss, and you no longer have to worry about making a 5% loss into a 20% loss.  How many times have you invested in a company, only to watch the stock price move 5%, 10%....40% lower before you finally said, yikes, I have to sell and take whatever money I can get back!

I've done it before. Then I started using a stop loss. Now, I already know how much money I am going to lose if I am wrong, and if the stock price moves higher, I can move up my stop loss to protect my gain.

If you lose $500 on an investment, you need to make $1000 just to break even. What if you held too late and lost $1000. Now you need to make $2000 just to break even.

By increasing your stop loss as the price moves higher, you no longer have to worry about taking a profit, and watching it dissolve into a loss. If you're now up $1500, it’s great knowing that regardless of what the stock price does, you're going to make at least $1000?

There are many factors that we cannot control, including market makers, world events and just the general mood of investors around the world. Many great companies have experienced a downtrend for no apparent good reason.

Know your reasons for getting into the stock market, learn to control your emotions, and, know how much money you are prepared to lose. It makes selling the stock so much easier when the time comes.