Bag Holder

What is a Bag Holder?

An informal term, bag holder, is used to describe such an investor who symbolically holds a security or stock that decreases in value until it becomes worthless. In most scenarios, the bag holder retains the holdings for a specific period wherein the investment value goes down to zero.

Let’s take a bag holder example here. Suppose there is an investor who bought 100 shares of a new technology-based startup. Although, during the Initial Public Offering (IPO), the share price increases; however, it starts dropping thereafter.

And, with consistent bad earning reports, it becomes clear that the startup is struggling and the stock price goes down even further. If the investor is holding the stock, despite the losses, he would be known as the bag holder.

Understanding Bag Holder

Practically, there are a few methods that can help comprehend whether a stock could be a bag holder candidate. For instance, if the share prices in a company fluctuate along with the economic disruptions, then there could be a chance that conquering difficult times could result in the turnaround of the share price.

However, if the fundamentals of a company are not on the right track, the share price will never recover. Therefore, the stock’s sector could signal towards outperforming in the long-term period.

Defining Sunk Cost Fallacy

The sunk cost fallacy is another similar situation that may cause an investor to become a bag holder. Basically, sunk costs are those unrecoverable expenditures that have occurred already. Often, bag holders surrender to the sunk cost fallacy that leads to irrational positions for longer periods.

Let’s take an example here. Suppose an investor bought 100 shares at Rs. 10 per share. The entire transaction value will be Rs. 1,000. If the stock goes down to Rs. 3 per share; the Market value of this holding will be Rs. 300. Thus, the loss of Rs. 700 will be regarded as a sunk cost.

Although several investors wait until the stock gets back to Rs. 1,000 so that they can recoup the investment; however, since the loss has occurred already, the sunk cost will be regarded permanent.