WHAT IS Adding To A Loser
Adding to a loser is a term that refers to an instance in which a trader or investor increases their position in an asset when its price is heading in the direction that is the opposite to what the investor or trader desires.
BREAKING DOWN Adding To A Loser
Adding to a loser refers to situations in which an individual invests more in an asset, even though that asset is performing antithetically to the investor's wishes. Adding to a loser is not generally considered a wise investment move, as unless the asset under questions moves towards the investor’s desired directions, the investor has just increased their losses.
There are several reasons an investor may add to loser positions. The most common one is an emotional response, in which an investor might add to a losing position instead of closing it because he or she gets emotionally attached to the asset and has a hard time accepting that it was a bad investment. However, it is important, once the investment continues in the wrong direction, to reevaluate the reason for having the position rather than putting more money at risk.
Examples of Adding to a Loser
There are many reasons an investor would take on the risk of buying more shares of a stock even once the shares they already own decrease in value. If an investor adds to a loser they lower the average purchase price of the stock, and this can increase an investor’s capital gains when the investor eventually decides to close their position on the stock. If you are an investor you may buy 1,000 shares of a stock at $50 a share, and after a month, the stock falls to $40 a share. As an investor, you may see this as an opportunity and decide to buy another 1,000 shares at the new lower price. So you have 1,000 shares you paid $50 for and 1,000 shares you paid $40 for, making the average price you paid for a share $45. When you purchased the second set of shares, you as the investor added to a loser. Many investment analysts recommend to stay away from this kind of investing. It can be a great investment strategy if you have some knowledge of a company and the stock eventually increases in value.
However, it is a risky maneuver, as it is easy to become emotionally tethered to a bad investment after dedicating time and money.