A bag holder, in investment slang, is a person left with essentially worthless shares and other securities after a sudden fall in value. These investors have clung to their purchases too long and cannot make a profit, or break even, if they attempt to sell them. This may be the result of manipulative practices on the part of other investors, lack of foresight or attention by the bag holder, or other issues. If such investments make up a sizable portion of the investor’s portfolio, they may create a substantial loss that could be difficult to recover.
One example of a situation that can make an investor a bag holder is poor research at the time of a purchase. Investors who primarily follow trends may put themselves at risk of investing in bubbles, and if they do not keep up with the stocks in their portfolios, they may fail to sell them in time. All stocks can experience fluctuations in value, and people must be attentive about tracking their investments to determine when it’s time to sell.
Clinging to investments can also turn someone into a bag holder. Investors may notice a drop in price and decide to wait it out by holding their investments instead of selling and abandoning the position. The belief that this is the right decision can increase as the price drops, because the investor expects it to trend back up again. By the time the stocks are worthless, it may be too late to take any action.
Market manipulation can also play a role. In a classic example, a bag holder may be a victim of what is known as a pump and dump scheme. Investors may hype an investment, promoting it as a good buy and making large purchases themselves, to drive the price up. They generate an inflationary bubble, attracting innocent investors who see the increased activity and decide to buy in. Once the price hits a given target, the investors can quickly sell out their positions to make a profit, leaving those not in the know with substantial losses.
There are some tactics investors can use to reduce the risk of becoming a bag holder. One option for people who are not very knowledgeable is to entrust investments to a specialist with experience in this area. Investors can also ask for mentoring if they want to assemble and maintain their own portfolios. This can include buying and selling advice as well as information on how to research to keep up with industry trends.