Bag holder is an informal term used to describe an investor or trader who holds on to a position in a stock or in any other financial security that decreases in value for an extended period until price goes to zero.
Generally beginners or novice traders get into poorly-performing penny stocks or out-of-the-money (OTM) options hoping they will rebound to double or triple their money.
These bag holders own financial securities that have lost their worth over time.
Any type of investor or trader can become a bag holder for different reasons. But, in general, retail investors with limited investing or trading knowledge are more likely to become a bag holder.
Here are few reasons why investors or traders become bag holders;
- they are unwilling to acknowledge a poor trade and realize a loss.
- due to the tendency of investors who hold onto losing trades for too long, and exit profitable trades too quickly.
- invested in securities based on friend’s or relative’s suggestion, or through a social media channel without doing their own due diligence
The best way to avoid becoming a bag holder is by conducting sufficient research on an investment before investing and sticking to companies with good fundamentals.
