Adding to a loser refers to any investor taking on additional shares of a possessed stock that is decreasing in value. Although it seems risky and worthless, this investing technique can have a use, and it is up to a trader’s predictions to determine if it can be a worthwhile move. Following is some information on what adding to a loser is, and how its use can be profitable (or risky).
What is Adding To A Loser in Stock Trading?
This investing term simply refers to an investor’s taking on additional shares of a security (for which some shares are already in possession) when the price is dropping. Although this lowers the average price per share (as does dollar-cost averaging), it can be very risky, as when the stock fails to experience a reversal, the entire investment can be a loser.
Risk and Adding To A Loser Investing Example
Suppose that a trader took on 100 shares of a stock when it was trading at $9 per share. Since then, it has dropped down to $8, and the investor decides to purchase another 100 shares. Though this decreases the average price per share (by $0.50, from $9 to $8.50), the fact that it has dropped so much can show that it has enough downward momentum that it will continue falling, and all shares will lose money. The possibility of the stock’s price continuing its decline is the risk.
Investing Strategy and Adding To A Loser in Investing
The act of taking on additional shares as a stock drops, increasing the position in the stock is only worthwhile when price turns around and actually increases enough to mean profit. In the above example, where $9 was spent on each of 100 shares, and $8 was spent on each of 100 shares (meaning, essentially, that $8.50 was spent per share) the price must increase past $8.50 to make a sale of all shares profitable.
Any trader should try to justify adding to a loser. Before taking on additional shares at a lower price, always look for evidence that price will increase, because if it keeps dropping, the investment will be a losing one. Referring to any news reports, available for free at discount trade sites like Robinhood, E-Trade, and TD Ameritrade, and basing any buys which add shares to a losing investment on positive news, or other predictions that price will rise can make adding to a loser in stock trading worthwhile; if a trader is right, and price does subsequently increase, money can be made in selling later after price has risen.
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