How To Recover Losses In Stock Market: Nobody invests in the stock market to incur losses. But wisdom lies in admitting that losses are a part of trading and investing.
Individuals who have mastered the art of trading in the stock market do not try to avoid losses. They try to minimize their losses by using various strategies, stopping losses, etc.
Losses can be minimized by selling a stock when the prices fall 8-10% from the purchase price. Investors find it difficult to admit their mistakes and sell investment holdings at a loss.
However, realizing capital loss and selling stocks before the situation becomes worse is what separates successful investors from the rest. Therefore, one of the primary lessons in investing is to learn how to recover losses in stock market.
Remember, in equity markets, the biggest risk is not taking any risk. By doing so, individuals tend to compromise on the wealth-creation potential of the portfolio in the long run.
Once an individual incurs losses on the portfolio, they should re-enter the market with both psychological preparation and astute discipline.
Domestic markets have seen significant volatility in recent times principally due to high inflation fears, higher interest rates, decisions by the US Federal Reserve, global tensions, etc.
Therefore, understanding how to recover losses in stock market has never been much important. In this article, the focus will be on strategies that can help individuals in recovering losses. Read on to find out!
Types Of Losses
Before understanding how to recover losses in stock market, it is important to understand the types of losses traders and investors can see. Capital loss refers to the loss which is incurred when an investment is sold at a price lower than the purchase price.
In the world of investing and trading, this sort of situation takes place when you lose money because of selling a stock for a lower than the purchase price.
While some individuals hold on to the stock even though prices continue to fall, a capital loss is incurred when an individual loses actual money. This loss can be divided into short-term and long-term capital loss. It can be set off against capital gains for reducing tax liabilities.
The second type of loss that an investor might face is opportunity loss. Opportunity loss refers to the difference between optimal price and actual price payoff.
Let us understand this with the help of an example. Assume that you purchase a stock for INR25,000. At the end of a year, this investment has risen only by a small margin or it has remained at the same level.
Now, you might think that you haven’t lost anything. However, if you think hard, you have lost an opportunity of making more money by investing that same INR25,000 elsewhere. Thus, opportunity loss is a loss that is incurred from not choosing the best alternative.
Finally, most investors are not able to estimate the top or bottom of a particular stock. Therefore, they end up holding such shares when they rise and they are not able to accurately anticipate the fall in such securities.
More often than not, such a situation arises in volatile stocks as such shares tend to rise significantly before falling. There are investors who continue to sit tight even after such a fall in the hope that shares will recover.
However, that might not be the case every time. The best thing in such a situation is to book reasonable gains and walk away. Now that you know the most basic types of losses that are incurred by investors, we will understand how to recover losses in stock market.
Recovery Of Losses In The Stock Market
This procedure starts with analyzing and monitoring your trading errors. Smart and seasoned traders focus on minimizing losses rather than eliminating them completely. The smartest ones analyze their trading or investment strategy in detail and try to figure out what went wrong and how.
Even though it is quite easy to blame the market or some other unexpected event for the losses incurred, it is of utmost importance to ensure that trades executed are according to your risk appetite.
It is important to analyze whether you have timed the market correctly. If not, what can be the possible reasons for the same? Try to avoid committing the same mistakes and fill the gaps in the trading or investing strategy. Accepting the loss and coming up with a refined trading strategy is the first lesson.
Another important step to recovering the losses is to adopt a stop-loss strategy. Investors hold their shares even when they suffer trading losses as they hope for a market revival. This is not a good practice.
Investors are required to have well-defined reasons in place to decide whether and when to sell investment holdings. For example, news and updates about quarterly performance or annual performance should be tracked carefully.
If the company is expected to report poor financial performance, be cautious. Having a stop-loss order on shares, particularly on more volatile stocks, can help reduce further losses.
Investors or traders should also try to score small gains. Rather than indulging in revenge trading, stay satisfied with the small and reasonable gains.
The investment amount should not be so big that you are scared to make solid bets. However, it can’t be so small that you don’t take the trading seriously. Therefore, a judicious investment approach is required.
Since the stock market is quite dynamic, it is of utmost importance to monitor and assess the portfolio’s risk. Ensure that the portfolio risk is aligned with your risk appetite.
If there is any deviation, take the necessary steps. You can have some flexibility if your focus is long-term. Make sure you have an idea of the maximum capital amount that you are ready to put at stake. Analyzing the investment portfolio is very important so that better opportunities can be used to our advantage.
Also Read: 5 Beginner Mistakes in the Stock Market – Know them Before Making Losses!
To Sum Up
Once you have incurred significant losses, make sure that you manage the risk aggressively this time. Risk management and trading psychology should be the main focus points.
Be opportunistic and make sure that you are updated about the market events. If you see any positive news, make sure that you take appropriate steps to make short-term gains.
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