What is a 'Bag Holder'?

An informal term used to describe an investor who holds a position in a security which decreases in value until it is worthless. In most cases, the bag holder will hold the position for an extended period during which most of the investment is lost.


A bag holder refers to an investor that is symbolically holding a “bag of stock” that has become worthless over time.

Example of a Bag Holder

Suppose that an investor purchases 100 shares of a newly public tech start-up. While the share price briefly rises during the initial public offering (IPO), it quickly drops as analysts begin to question the business model. The subsequent earnings results show that the business model is struggling, and the stock price continues to fall. The investor that chooses to ignore the deteriorating indicators and continue to hold the stock is a bag holder.

Disposition Effect

There are several reasons why an investor may hold on to a security as it becomes worthless. For example, an investor may simply neglect his or her portfolio or hold on to a stock because they are unwilling to admit that they were wrong about the premise for a trade.

The disposition effect is the tendency among investors to sell shares in a security whose price has increased while keeping securities that have dropped in value. In other words, investors tend to hold on to losing positions longer than winning positions. Investors tend to dislike incurring losses much more than they enjoy making gains, which causes them to gamble on the idea that losing positions will turn around and prematurely lock in profits for winning positions.

An example of this effect and its underlying causes is illustrated by prospect theory. In general, people would much rather receive $50 than have $100 and lose $50 even though the end result in both cases is $50. Other examples of this effect are individuals who prefer not to deposit money in banks even though it would earn interest or individuals who choose not to work overtime because they may incur higher taxes.

Sunk Cost Fallacy

The sunk cost fallacy is another reason that an investor may become a bag holder.

Sunk costs are costs that have already been occurred and cannot (or are unlikely to be) recovered. For example, suppose that an investor purchased 100 shares of stock for $10 in a transaction valued at $1,000. If the stock falls to $5 per share, the market value is just $500. The $500 lost is a sunk cost at that point in time. Many investors are tempted to wait until the stock goes back up to $1,000 to recoup their investment, but the losses have already become a sunk cost.

Many investors hold on to a stock for too long because it’s an unrealized loss, which means that it’s not reflected in their actual accounting until the sale is complete. In some cases, this encourages investors to perceive an opportunity for prices to recover.

The Bottom Line

Bag holder is an informal term used to describe an investor who holds a position in a security which decreases in value until it is worthless. Bag holders often succumb to the disposition effect or sunk cost fallacy, which causes them to hold on to a position for too long.

  1. Sunk Cost Trap

    Sunk cost trap refers to a tendency for people to irrationally ...
  2. Worthless Securities

    Worthless securities have a market value of zero.
  3. Contract Holder

    A contract holder is a party who receives benefits outlined in ...
  4. Opportunity Cost

    Opportunity cost is a benefit missed when an investor, individual ...
  5. Base Rate Fallacy

    Base rate fallacy, or base rate neglect, is a cognitive error ...
  6. Primary Account Holder

    A primary account holder is the individual who is legally responsible ...
Related Articles
  1. Insights

    How To Recognize Sunk Costs

    Find out about sunk costs and why "getting your money's worth" can cost you more than you think.
  2. Personal Finance

    Airline Baggage Policies: What's New, How to Save

    The cheapest flight may not be so cheap if you add in baggage fees.
  3. Trading

    The art of cutting your losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  4. Personal Finance

    Top New Trends In Airline Travel

    Learn more about the newest policies and procedures of America's airlines, and find out how these changes are affecting profit margins.
  5. Insights

    Carry a Carry-On? New Security Rules Go Nationwide

    Don't spend any longer going through security than necessary. Learn these new rules.
  6. Investing

    The Art Of Selling A Losing Position

    Knowing whether to sell or to hold is tough. And no rule fits all. Find out what to consider.
  7. Investing

    Don't Go Broke Buying Bankrupt Stocks

    Don't be tricked by bankrupt companies' low stock prices; they're low for a reason.
  8. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  1. Are all fixed costs considered sunk costs?

    Find out why all sunk costs are considered fixed, but not all fixed costs are considered sunk; see why variable costs become ... Read Answer >>
  2. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
Trading Center