When Does a Loss Become a Loss?

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When Does a Loss Become a Loss?

When you say, "I can't sell a stock because I don't want to take a loss," you assume that what you want has some bearing on the situation. Yet the stock does not know who you are, and it doesn't care what you hope or want.

Furthermore, you may believe that if you sell the stock you will be takingthe loss, but selling doesn't give you the loss; you already have it. If  you think a loss is not incurred until you sell the stock, you may be kidding yourself. The larger the paper loss, the more real it will become.

For example, if you paid $40 per share for 100 shares of Ace Chemical, and it's currently worth $28 per share, you have $2800 worth of stock that cost you $4000. You have a $1200 loss. Whether you convert it to cash or hold the stock, it is only worth $2800.

You took your loss as this stock dropped in price even though you didn't sell; now you will probably be better off selling the stock and going back to a cash position. You can think more objectively with cash in your stock account than you can if you're worrying about a stock that has lost money for you. Anyway, there are other securities where your chance of recouping your loss could be far greater.

Here's another suggestion that may help you decide whether or not to sell. Pretend you don't own the stock and you have $2800 in the bank. Then ask yourself this question, "Do I really want to buy this stock now?" If your answer is "no," then why are you holding it?