Bagholder definition
Refers to a shareholder who owns a stock whose value has decreased to zero or near zero.
What is a bagholder?
Bagholder is a synonym for an investor who owns worthless stocks. Initially, the bagholder (investor) expected that the stock price would increase and make a profit. But the price plunges so low that it becomes worthless.
When the stock price gradually decreases, investors may sell the shares they own in order to limit their loss. Yet, some investors don't do it, believing that the decrease is temporary, and the price movement will change its direction. While waiting for this reverse, the stock price deeps down even further, and the investors end up losing a big portion or even the entire amount invested.
Bagholder meaning
Investors become bagholders due to a variety of reasons. For instance, they could be too stubborn to get rid of shares with diminishing values, with expectations the price would rise in the future. Another reason could be an inadequate analysis of the shares. Investors may conclude that the stock price will move up again and keep the stocks. Unwillingness to accept a loss is another reason why investors become bagholders. In addition, shareholders can be manipulated through a pump and dump scheme.
A variety of reasons can also cause share prices to fall down. They include pessimistic expectations about company development and growth, announcements regarding the fraud performed by the company or its management, low level of earnings, or unfavourable economic situation. Bad management is yet another reason that can lead to a decrease in company market value.
Let’s assume that investors buy shares from a newly traded company. They pay $25 per share. For one reason or another, the price starts decreasing. When it happens, investors have two basic options: to hold and hope for reverse, or to sell. Investors willing to sell the stock at a depreciated price are accepting the loss and trying to get back as much money as they can. Other investors firmly believe that the stock will bounce back. After a while, the stock price is almost zero, and investors holding a worthless stock are called bagholders.
