Types of Stock Market Losses
Stock investing is not insured against losses. Just on the contrary, losing part in the stock market is part of the game with which you should become used to. If you still haven't lost any money you haven't been enough time in the stock market and your turn will come sooner or later. On the other hand, you may have already sustained some losses, but haven't been able to recognize them since they come in a variety of forms.
One of the simplest forms of losing in the stocks market is by selecting and purchasing a stock whose price starts to gradually fall. At a certain point you decide that you have seen enough. You sell the stock and live with the sustained losses. The explained loss is commonly referred to as capital loss. It includes to loss of actual dollar amount. Aside from offsetting huge profits for tax purposes, capital losses may be used as a lesson to avoid committing the same mistakes in the future.
Another type of loss is the so called lost opportunity. It is less painful than the capital loss, but still has its implications and negative effects.
The lost opportunity loss represents the investment you could have made with the money you have locked in a stock that haven't brought you any profits. Even though you haven't lost any dollars from the stock that you have purchased and remained at the same price levels, you could have used the same money for other investment purposes, which could have brought you profits. Even a savings account in a bank would have returned you some money.
The lack of movement on the part of the stock means that you are losing money. Even if the stock's price doesn't drop you are sustaining opportunity loss.
Missed profit loss results when the investor watches the rising of the price of a stock. When it reaches its top the price starts to fall. The investor has missed the top point at which s/he could have made a profit. Instead, s/he hopes that the stock will resume its high levels. However, this rarely happens and even if it happens it will doubtfully be the same level as the one reached at first.
Tips for Preventing and Dealing with Losses
- Evaluate the worthiness of a certain investment by measuring it against a US Treasury Note, which provides risk-free investment with relatively small returns. This will help you determine how much more the particular stock will bring you and whether the risk of sustaining losses is worth it.
- In order to avoid missed profit losses don't be too greedy and apply common sense when you see the price of your stock rising. Otherwise, you risk missing the high level and you will have to put up with a lower less beneficial one at best.
- Never console yourself that the losses you have sustained are just on paper and are not realized until you sell the stock. If you are convinced that the losing stocks still represent good long-term investment potentials, you should consider holding them disregarding the current lack of good performance. Otherwise, the paper losses will be turned into lost opportunity for each day you keep your stocks.
There is no person who likes losing money. However, you should accept the idea of losing some money from time to time. Additionally, whenever you notice that your stocks are losing their positions and their long-term prospects are not good, it may be better to sell them and move on to a better deal.
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