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Holding On To A Loss-Making Share? How Ah?

In the recent light of our very own Singapore Airlines (SIA) reporting a surprising recent quarterly loss of $138 million, resulting in the share price to drop by 7.3%, led us to some serious questions. 
 
What should one do if he is holding on to a loss making shares? You see, most of us out there knows very well to invest and attempt to beat inflation. However, little knows what to do when they picked the short stick for their investment? Given that human beings are not brought up to handle losses, it is common to feel at a loss of what to do when facing critical decisions with regards to a losing investment.
 
There is no hard and fast rule when coming to a decision to hold or sell a losing stock. Before any decision, however, here are some facts investor needs to understand.
 
Waiting To Break Even Can Erode Your Investment Returns 
The most common thing people do is to hold on to a losing stock with the wrong mentality. Usually convinced that they made the right choice, this group of investors wait and pray for the share price to breakeven.
 
If one spends a little bit of time calculating what that means, he would have come to the realisation of the difficulty of it. Basically, for every percentage a stock price decreases, it finds itself with a higher mountain to climb to break even.
source: Investopedia
 
An example will be SIA’s share price dropping by 7.34%, from $10.74 to about $9.79. To break even back at $10.74, the share price will now need to increase by 9.7%.
 
To exaggerate things a little, if the price of a stock at $1 drops by 50% to $0.50. It will need to increase by 100% just to be back at its original price of $1.
 
The Stock You Bought Does Not Care About How Much You Paid Per Share

This is not to say that a rebound is impossible.

The stock you bought does not know how much you paid per share, neither does it care. Hence, your personal gain or loss is entirely your own responsibility. In a perfect world, investors will always try to achieve the objective of selling a stock at the highest price and buying at its lowest, but this is not always possible in real life.

If one is familiar with the factors affecting stock prices, he will realise that past prices of the shares are not a factor that affects future price of stocks. 

Questions To Ask Yourself

Now that you understand the two facts stated above, the decision to sell or hold on to the shares boils down to a few questions. While answering these questions, one needs to detach himself emotionally and look at the numbers and facts behind the shares he bought.

  • What indicators or numbers did you look at that resulted in you purchasing the stock?

Recommendation from friends or forum should never be one of the reason!

  • There is usually a reason for any change in price to the stock. What changed ever since you bought the stock, resulting in the changes to the indicators you were using? 
  • Will you still be keen to invest in the company, having looked at the new figures? Is there any good reason to continue holding on to the stocks? If not, maybe it is time to sell it. 

source of top image

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