The Risk of Holding on to Dropping Shares

Investing in shares is always a risk. There is no guarantee you will make short term profits and even it is possible you may never make profit with your investment in certain shares. Shares are long-term investments and we all expect to reach a higher return than a savings account. The key is buying low and selling high but you never know when it is the best time to buy your shares and you also don’t know when it is the best time for selling.

It may happen your shares start to drop and keep dropping day by day and you are wondering if it is a good idea to keep your shares or if it is not better to sell your shares. You never know how long this dropping trend will continue and if there is a chance you can recuperate your losses. As long you don’t sell your stocks you don’t lose real money and you may see the drop of the value of your shares as a loss on paper. There are many situations when the loss is temporarily and there is a chance you can make a huge profit on the long run. It is time to do research because there are several reasons which may declare why they dropped.

There are several risks on holding on to dropping shares but you can also take a wrong decision if you sell because you need to find an alternative to gain back the money you lost. In certain situations it can be better to keep them in your portfolio because it is only a loss on paper and it is possible you make profit in a time span of ten years or more. Here are some risks of holding on to dropping shares:

1. You bought your stocks when they reached a peak price

Stocks are a long term investment buy you never know when it is the best moment for buying stocks. It is often a good idea to buy stocks during a recession or time when the economy is growing slowly because the value of most stocks will be low. You need always to be careful to pick stocks of companies which are solvable and have a good perspective for the future.

It is important to check the ratios and their results of the past. You need to be aware that details of the past are no security for the future and you need to diversify in different sectors to limit the risk. It is often best to buy regularly stocks so that you avoid buying always when the price is high.

It may happen that you bought your stocks just before a market crash or your stocks dropped dramatically in value. In this situation it is often not a good idea to sell your stocks even if they keep dropping. You knew before that stocks are long term investments and there always periods that the value of your stocks drop in value.

You need to check if your stocks have a chance to rise back to the price you bought them; otherwise you can best sell them. It is possible they dropped in a few weeks with 50% or more; this means the value of your shares needs to increase with 100% or more. You can take the risk of holding on to your dropping shares but you need to be aware that most companies can’t reach such high return in a few years and certainly not within a few months. If the future looks bad for the stocks you have in your portfolio you can consider to sell them or a part of them and put them in a savings account. When the stock market crash is over and the economy is back growing you can consider investing a certain part of your money in emerging market because the value of these shares will often rise faster than shares of safe sectors.

2. You expect bankruptcy of the company where you have stocks from

It is possible you bought stocks of a company where the future looked promising but certain situations can cause that they get financial trouble. If you notice a dropping trend you can best sell your stocks and investigate if you can’t find stocks which can rise so that you will make your loss to a profit after some months or years. This is better than taking the risk to lose all your money you’ve invested in this company.

3. Your risk profile is not conform your investment profile anymore

Holding on to dropping shares can cause your risk profile is lower than your investment profile. For example, you are an investor with a balanced investment profile (50% in bonds and 50% in stocks) and it is possible that your dropping shares cause that you have only a low percentile stocks in your investment portfolio.

You need to make a difficult decision. Is it a good idea to sell your dropping shares or not? Nobody can give the right answer because selling means that you have to search for an alternative to gain back the money you lost. In times of recession it is often difficult to know if this is a good situation. If your shares dropped already with 50% or more and the solvability of the company is good it is probably a bad idea to sell them because you have no alternative to replace them. Time can solve your problem because shares are long term investment and you don’t need to worry if you respect the time span of your investment.

Holding on to your dropping shares can also cause you never gain your money back. If you invested just before the technology crisis of 2000 in this sector you can better search for an alternative. It is best you investigate the market and replace your dropping technology shares through shares in companies with growth possibilities.

4. Losing all your money you’ve invested in the dropping shares

Holding on to dropping shares can cause you lose all the money you’ve invested in this company. A fundamental analysis of your shares is necessary. Liquidity, solvability and rent ability of the company are important factors to decide holding on to your dropping shares or selling them. The PER (price to earning ratio) is an important issue; it shows if the value of your shares is overvalued or undervalued. It is best you compare the return of your shares with important market indexes, for example Dow Jones, NASDAQ and certainly the market index of the sector where you’ve invested. If your analysis shows your stocks will not rise and even drop more you can best sell your stocks with loss than losing all the money you’ve invested in these stocks.

It is real important to check the value of your shares regularly. You don’t need to worry immediately if some of your shares drop a little bit but you need to be aware about the technical analysis of your shares. Dropping shares can also be an opportunity to buy more if you expect a rebound. You really have to know if it is profitable to hold your shares or not otherwise you may not reach your goal.