Bag Holder

What is the holder for bag’?

The informal term used to describe an investor who has a position in a security that decreases in value until it is worthless. In most cases, the bag holder will hold the position for a long period during which most of the investment is lost.

Punching ‘bag holder’

Bag holder belongs to the investor who symbolically holds a “suitcase” that has fallen into disrepair over time.

Sample bag holder

Suppose that an investor buys 100 shares of a new public start-up technology. While the stock price briefly rises during the initial public offering (IPO), it drops quickly, as analysts begin to question the business model. Subsequent financial results show that the business model is struggling and the stock price continues to fall. An investor who chooses to ignore the deterioration, and to continue to hold the stock is the holder of the bag.

The Effect Of The Disposition

There are several reasons why an investor may hold in a security, as it becomes useless. For example, an investor could simply ignore his or her briefcase or to keep in stock because they don’t want to admit that they were wrong about the premises.

The effect of the order-the tendency of investors to sell shares of a security whose price has increased while preserving the securities which have fallen in price. In other words, investors tend to hold losing positions more advantageous position. Investors generally don’t like to suffer losses much more than they are some kind of result, which causes them to gamble on the idea that losing positions will turn around and too early to take profits on winning positions.

An example of this effect and its underlying causes is illustrated by prospect theory. In General, people would rather receive$ 50, $100 and lose $50, although the end result in both cases is$ 50. Other examples of this effect are individuals who prefer not to keep money in banks, even if it will earn interest or people who don’t want to work overtime, because they can charge higher taxes.

Sunk Cost Fallacy

The sunk cost fallacy is another reason that an investor can become a bag holder.

Sunk costs are costs that have already occurred and can not (or is unlikely) to recover. For example, assume that an investor bought 100 shares for $ 10 as part of the transaction, which is valued at $1000. If the stock falls to $5 per share, the market value is only $500. $ 500 lost is a sunk cost at this point in time. Many investors tend to wait until the stock rises to $1,000 to recoup their investments, and the losses have become a sunk cost.

Many investors hold on to stock for too long, because this unrealized loss, which means that it does not affect their actual accounting to sales. In some cases, it makes investors perceive the possibility of price recovery.

Bottom Line

Bag holder is an informal term used to describe an investor who has a position in a security that decreases in value until it is worthless. The bag holders often succumb to the alienation effect or sunk-cost fallacy, which causes them to hold position for too long.

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