Recovering from Stock Market Losses
(includes calculator)

By Stock Research Pro • January 10th, 2009

Most stock market investors, if they are at it long enough, lose some amount of money. It is, unfortunately, the nature of stock market investing and inherent to the risk profile of stock market investing. It is said that the difference between successful stock market investors and the others is in their approach to dealing with losses.


Types of Stock Market Losses

Capital Loss

This is a loss that is realized, in hard dollars, by the investor. The one bright spot to these realized losses is that they can be used to offset profits (capital gains) for tax purposes, as long as they are in taxable accounts. There are times when, in fact, selling a at large losses can actually produce a taxable profit.

A word of caution regarding capital losses: Money that will be needed within the next several years (3-5 or so) should not be invested in the stock market no matter how well the market or a stock is performing. It can, unfortunately, take a number of years to recover from stock market losses, making the stock market a dangerous place for those retirees and others who will need that money in the relatively near-term.


Tax information regarding capital losses

Paper Loss

A paper loss occurs when the price of a stock you own drops below (possibly well below) the price you paid for the stock. You then own a stock at loss and need to decide what to do. If you still believe that the company is financially sound with solid long-term prospects, you may decide to hold on to it. If, on the other hand, your re-evaluation of the company raises cause for concern and sheds light on the real reasons for the decline in price, it may be time to cut your losses and sell.

Lost Opportunity

As you know, every investment must be evaluated against opportunity cost. Lost opportunity can occur when, for example, a stock breaks even. In that case, the investment performance should be evaluated against the alternative investments and the returns those might have brought.

Missed Profit Loss

This loss results when a stock you purchased sees an increase (possibly a significant) increase in price but falls back before you sell and take your profits. This is not uncommon as few people (even few experts) are consistently successful at determining the top of a stock price.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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