What does it mean to be a bag holder? A bag holder, in the investing world, is someone who holds onto a stock long after it has continuously declined significantly in price. They are literally "holding the bag" of worthless shares.
In this article, we will explore this topic in more detail, and most importantly, how to avoid being one.
What is a bag holder?
In a more detailed explanation, a bag holder is someone who continues to hold a position in security even after it has become worthless. The term generally refers to investors who bought stocks but it can also apply to any type of security, such as bonds, mutual funds, cryptocurrency, or options. Buyers at the top of bull markets will often find themselves becoming bag holders.
This is because they paid too much for the security as the market begins to correct itself. Market cycles happen, especially in volatile assets such as penny stocks and cryptocurrencies.
When there is volatility, there are bound to be corrections. These corrections are a natural part of the market. They usually present opportunities to buy assets at a discount. They also trap some traders and investors to buy at the top.
What is a bag holder in stocks?
In simple terms, a bag holder is an investor who buys a security at a high price and then watches helplessly as the price drops, sometimes to zero.
What does bag holder mean in Crypto?
The term "bag holder" can also be applied to cryptocurrencies. When a person buys into a digital currency and it tanks shortly after, they are said to be "holding the bag".
For example, if Bitcoin were to drop sharply in price and you were to buy it at $69,000, you'd be considered a bagholder. This is because you'd have to sell at a loss or "hold onto the bag" until the price goes back up.
Who can be considered a bag holder?
A bag holder is someone who has been duped. They have been convinced to hold onto something that has no value. This could be a physical bag of goods that are counterfeited or otherwise worthless. Or, it could be a bag of trash that someone convinced them was valuable.
In the financial world, a bag holder is someone who continues to hold an asset even after it has stopped giving them value. The most common reasons for this are because they are hoping the stock will rebound, or because they do not want to admit they have made a mistake.
Where does the phrase bag holding come from?
It can be difficult to pinpoint exactly where this phrase came from but there are two theories. The first theory is that this phrase comes from the days when men would carry their belongings in a cloth sack (or "bag").
If they lost all their money and were left with nothing but their bag, they were said to have been "left holding the bag."
In the case of investing, the bad would represent the assets. The second theory comes from modern slang.
For example, if you were to buy into a position, you would be "getting a bag". Let's say you got a bag (assets) at a certain price and the market left you by crashing unexpectedly, you'd be "stuck holding the bag".
How to avoid being a bag holder
The best way to avoid being a bag holder is to have proper risk management in place. This means knowing when to buy and sell. Thankfully we have a few tips to help you manage your risk more effectively. These strategies and tips are important to learn if you want to avoid being a bag holder.
1. Use stop losses
It's also important to have a stop-loss in place. A stop-loss is an order that automatically sells your position when it reaches a certain price. This is beneficial because it takes the emotion out of the equation and ensures that you don't hold onto a losing position for too long.
2. Take profits regularly
Have you ever head heard this common Wall Street expression - “Nobody ever went broke taking profits”? This shows you the importance of taking profits, and it is also another way to avoid being a bag holder.
This means selling a portion of your position as it rises in value. For example, if you bought Bitcoin at $30,000 and it grew to $60,000, you could sell half of your position to take money off the table.
Taking money off the table means that you're selling some of your position to lock in profits. This is beneficial because it allows you to lock in gains and reduces the risk of being left holding a bag if the price were to drop sharply.
3. Diversify your portfolio
One of the most common tips given when it comes to investing and risk reduction is to diversify your portfolio. This means investing in different assets so that you're not putting all your eggs in one basket.
For example, if you only invest in cryptocurrency, you're more likely to be a bag holder than if you invest in a mix of assets such as stocks, bonds, and real estate.
Many people make the mistake of diversifying into the same asset classes or heavily correlated assets. This is a problem, that is called related diversification, and it doesn't do much to reduce your overall risk, and can be considered diworsification.
4. Avoid Buying At Market Tops
One of the main reasons people become bag holders is because they buy at market tops. A market top is when an asset has risen to its peak price and is likely to start dropping in value.
Many novice investors make the mistake of buying at market tops without realizing it. To avoid this, you need to be aware of market cycles and know when an asset is likely to start dropping in value.
You can do this by studying charts and using technical analysis. It can be difficult to know exactly when the top of the market will occur, but if there has been euphoria and a quick rise in price, a market top is likely to close.
A better strategy could be to look for undervalued opportunities when there is fear and uncertainty in the markets. Bear markets can often be filled with excellent buying opportunities. Instead of chasing returns with FOMO, be patient and understand the fundamentals of an asset.
Only invest if the price is undervalued or at least fair value if you want to avoid being a bag holder. Don't let the greed and herd mentality get the best of you.
5. Stay up to date with the market
It's also important to stay up to date with the market. This means reading news and analysis from reputable sources. Learn from the best and follow the market leaders. Doing this will help you understand what's going on in the market and make better investment decisions.
It's also a good idea to avoid wasting time on social media, as it's often filled with FUD (fear, uncertainty, and doubt). By staying up to date, you'll be able to identify opportunities and know when it might be time to sell.
Many people become bag holders because they stay in the market for too long and have unrealistic expectations in the short run.
6. Have A Long-Term Perspective
Finally, it's important to have a long-term perspective when investing. Many people become bag holders because they focus on the short-term price movements of an asset.
Maybe you don't mind "holding the bag" if you believe the bag is the supreme asset and will continue to go up in value over time.
In the end, it's important to do your own research and have a plan. Is the asset worth holding for the long term? Or are you looking to trade for quick profits and don't want your capital to be tied up in a position?
If you are a sane investor, it does not feel good to be a bag holder. But if you can take the emotion out of the market downturn, it can actually be a great opportunity to buy low and sell high. The key is to have patience and not give in to FOMO (fear of missing out).
Too many people buy after a hype train and are left at the place where they are holding a bag of worthless assets. Don't sell the shirt off your back to get a ticket to the bull market if you don't have a way to survive when the bears bring the market down.
This can be a recipe for disaster if you don't have any other sources of income. Bag holding is a way to poke fun at a poor situation but the reality is that it can be brutal. Invest wisely, and don't be a bag holder.