What is a bag holder in investing?

Definition and Example of a Bag Holder

A bag holder is an investor who maintains a position in a financial security while its value decreases. A bag holder may hold onto the stock in hopes that its price will eventually recover, or they may simply be unwilling to sell at a loss.

Although the concept of “bag holding” is not entirely new, the term has been used increasingly by today’s adult investors. Let’s learn more about the concept of bag holding exactly and how to avoid becoming one.

How Does Bag Holding Work?

Bag holding occurs when an investor holds onto a stock while its value declines and incurs losses instead of selling it. For example, if you buy 100 shares in a company at $50 per share and intend to hold the shares for several years. If the company’s stock value continuously declines for 10 years and the shares become worthless, you will become a bag holder.

If the stock price drops to $10 per share, which is only 20% of the price when you bought it, if you sell the stock at a significant loss, like $10 per share or only 20% of its purchase price, or if the stock price rebounds, then you wouldn’t be considered a bag holder.

It may be more likely for value investors to become bag holders, as they seek stocks they believe are undervalued. Value investors buy companies that may not be performing well in the market but believe they will recover in value. While this type of investing can often be profitable, it isn’t always the case. It may simply be that your expectations were wrong and the stock price keeps declining.

Bag Holding vs. Volatility

It is important to differentiate between bag holding and experiencing daily stock market volatility. When someone is a bag holder, they are holding onto a stock for a much longer period than they should, and its value has significantly decreased during that time.

Bag holding is more common among value investors than growth investors. Value investors buy companies they believe are underperforming and hold onto them for long periods under the expectation that they will recover.

Not everyone who sees a decline in their stock value is considered a bag holder. Let’s take the example of someone who bought Tesla stock in November when its price peaked at $1229.91. After more than a month, the stock price dropped to $899.94, meaning it lost more than a quarter of its value.

While Tesla investors saw a decline in the value of their shares, this was an example of a perfectly normal type of volatility in the stock market, not bag holding. Ultimately, in early 2022, Tesla’s stock price rebounded to trade above $1000 per share again.

What Does This Mean for Individual Investors?

One risk facing investors in the stock market is the danger that the value of company stocks may decline or even become worthless. No one can confidently predict the future and definitively say which companies will succeed and which will fail.

One way to avoid becoming a bag holder is to regularly review your investments and put a strategy in place for when to sell them. If you have held onto a stock for a long time and its price has not risen but rather fallen, it may be time to consider whether you should sell it.

Perhaps one of the reasons investors end up “bag holding” is that one common investment advice is to buy stocks at low prices and sell them at high prices. However, this advice is more about daily stock market volatility rather than failing companies. Ultimately, selling at a loss is better than holding onto a stock until it becomes worthless.

Taking

The Lessons

The bag holder is an investor who holds a stock while its value decreases or becomes worthless. The term bag holder has become popular among adult investors. Holding a bag differs from regular daily stock market fluctuations. Investors can avoid becoming bag holders by regularly reviewing their investments and exploring stocks that have declined over time without recovering.

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Sources:

Cambridge English Dictionary. “Be Left Holding the Bag.” Accessed Feb. 11, 2022.

Cryptocurrency Investing for Dummies. “Chapter 3: Recognizing the Risks of Cryptocurrency.” Accessed Feb. 11, 2022.

Yahoo Finance. “Sears Holdings Corporation (SHLDQ) Stock Historical Prices & Data.” Chart. Accessed Feb. 11, 2022.

Nasdaq. “Sears Holdings Corp (SHLDQ) Historical Data.” Accessed Feb. 11, 2022.

U.S. Securities and Exchange Commission. “Sears Holdings Corp 2020 Current Report 8-K.” Accessed Feb. 11. 2022.

Fidelity. “Growth Versus Value Investing.” Accessed Feb. 11, 2022.

Nasdaq. “How Not to Be a Bag Holder.” Accessed Feb. 11, 2022.

Yahoo Finance. “TSLA Interactive Stock Chart.” Accessed Feb. 11, 2022.

Source: https://www.thebalancemoney.com/what-is-a-bag-holder-in-investing-5218858