There are a number of instances where investment losses are recoverable. These cases fall broadly under three categories: excessive trading, unsuitable investments and misrepresentations. These are discussed more fully under the topic “What Types of Investment Losses are Recoverable.
Most people are unaware that investment losses can be recovered; they write off losses as imprudent decisions, or feel helpless and foolish for having had their trust betrayed. While not all losses are recoverable, the important thing is to speak to an experienced securities attorney as soon as you suspect wrongdoing. A careful analysis, including determining when the statutes of limitations are triggered is essential to evaluating any claim.
Where to Begin
The first step is going to the right forum. Many investors mistakenly believe the Securities and Exchange Commission will recover their losses for them. Others write letters to the Department of Corporations or the Secretary of State complaining about a broker or an investment loss. These organizations may initiate disciplinary or criminal action against wrongdoers, but they will not act as your advocate to recover your losses.
In order to recover your investment losses you must go to the proper forum. In most cases this means filing an arbitration claim with FINRA Dispute Resolution, Inc.
With few exceptions, any financial planning firm, and the individuals who sell investments for the firm must be licensed or registered to sell securities. Registration may be through the Securities and Exchange Commission as a “Registered Investment Advisor (RIA) or more typically, through FINRA as a “registered representative. Virtually all FINRA licensed firs require customers to arbitrate any disputes at FINRA rather than going to court. This is done by requiring clients to sign arbitration agreements when they open their accounts. Take a look at your client agreement. More than likely you will see an arbitration clause buried in the fine print at the end of the agreement. If your financial planner is not FINRA licensed, you will generally have to take him to court to recover your losses.
Arbitration before FINRA is generally quicker and less expensive than litigation. It is also binding, which means no appeals, absent extenuating circ*mstances. Arbitration is also designed to be easier on the parties. This means no depositions, limited discovery practice and no court appearances. And, although not private, there are no transcripts or court reporters allowed by non-parties to the arbitration. This assures a level of privacy missing in litigation. Also, FINRA offers a successful mediation program, which provides a less confrontational and even quicker means of dispute resolution than arbitration. One of the best things about arbitration is how quickly a dispute can be resolved. A typical case takes nine to twelve months from day of filing to final binding decision, significantly less time than most court cases.
If your agreement with your financial planning firm doesn’t have an arbitration agreement, you must seek relief in the courts. This can take years and be quite expensive. Unlicensed financial planning firms rarely use arbitration agreements, or if they do, they typically require arbitration before tribunals that are inconvenient and expensive. If you decide to business with an un-licensed firm or individual, consider why he or she isn’t FINRA licensed. FINRA sets minimum competency requirements for members, and requires brokerage firms to maintain minimum capital behind their firm. Unlicensed individuals aren’t held to the same standards.
FAQs
Most people are unaware that investment losses can be recovered; they write off losses as imprudent decisions, or feel helpless and foolish for having had their trust betrayed. While not all losses are recoverable, the important thing is to speak to an experienced securities attorney as soon as you suspect wrongdoing.
What happens if your investments lose money? ›
We all experience losses in our portfolios, whether because of a market downturn or just lackluster performance. Fortunately, losing investments can have a silver lining. Through tax-loss harvesting, you may be able to use them to lower your tax liability and better position your portfolio.
What is the 7% loss rule? ›
Always sell a stock it if falls 7%-8% below what you paid for it. This basic principle helps you always cap your potential downside. If you're following rules for how to buy stocks and a stock you own drops 7% to 8% from what you paid for it, something is wrong.
What is the $3000 loss rule? ›
If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses.
Why do 90% of people lose money in the stock market? ›
Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes. Tips from famous investors on how to achieve long-term success.
What is Warren Buffett's golden rule? ›
Buffett's headline rule is “don't lose money” and his second rule is “don't forget rule one”. This might sound obvious. Of course, it is. But it's important to look at the message within.
How much stock loss can you write off? ›
No capital gains? Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).
Do investment losses offset income? ›
Any taxable capital gain – an investment gain – realized in that tax year can be offset with a capital loss from that year or one carried forward from a prior year. If your losses exceed your gains, you have a net loss. Your net losses offset ordinary income.
Do you lose all your money if the stock market crashes? ›
When the stock market declines, the market value of your stock investment can decline as well. However, because you still own your shares (if you didn't sell them), that value can move back into positive territory when the market changes direction and heads back up. So, you may lose value, but that can be temporary.
Does the average person lose money on stocks? ›
About 90% of investors lose money trading stocks.
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
Do investors get their money back if the business fails? ›
In that instance, whatever cash is in the business following the sale of assets and the payment of any liabilities the business may have, proceeds will be divided amongst the shareholders on a pro-rata basis. In most instances when a business fails, investors lose all of their money.
Can you sue for stock losses? ›
Losing money in an investment account isn't necessarily grounds for a lawsuit. There are two available paths for legal action: arbitration or the court system. In many cases, class-action suits can co-occur with individual suits.
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
Do you pay taxes on investments that lose money? ›
You typically only have to pay taxes on the sale of investments when you receive a gain. To figure this out, you have to subtract the cost basis of your investment, which is normally what you paid, from the sale price to see if you had a gain or a loss.
Should I pull my money out of investments? ›
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
