If you buy some stocks and the market prices plummet, does it make any sense to hold the stocks just to see if it goes up again, so you don't lose money?
The only advantage I can think of is avoiding entry/exchange/broker fees. However, some people around me seem to see something wrong with this strategy.
Would it make sense with other types of assets like real estate, gold, collectibles, or whatever?
If the reasons you bought the stock are still valid then it's a bargain, and the low price gives you an opportunity to buy more. If the drop in price means that your initial analysis was wrong then you have to re-analyze the stock. If you'd still buy it at the current price, keep it. If buying it was a mistake, sell it.
Ignoring tax treatment, there absolutely is no difference between buying the stock in the past and the price falling and buying the stock in today's price. In both cases you have the same amount of stock worth the same price.
Assuming otherwise is called the sunk cost fallacy
Keep the stock if you would buy it today at today's price.
If you would've bought it in its current state, then keep it.
If you absolutely wouldn't have bought it in its current state, then sell it.
For anything in between, use your best judgement to determine how the stock will behave going forward.
Of course you should also take into account any applicable fees. Fees might make keeping it a more attractive option, but you shouldn't let it sway you too much in that direction - any significant drop in the stock price should make negligible the fee you would've paid to sell it earlier.
The future value of a stock is (generally) not dependent on whether or not you bought some of that stock, so the fact that you bought some shouldn't really affect your analysis of that stock and whether you think it's a good or bad investment.
Your subconscious may argue that you hang on to it as to not accept the loss, but that's not sound reasoning - the loss already happened, the past is behind us and nothing will bring that money back. Yes, maybe the stock will climb again (or maybe it won't), but that's independent of the money you've already lost - you could get a similar gain by taking the money out and putting it somewhere else (minus any fees).
The price of a stock could very well just keep falling, or remain fairly stable. There's no rule that says the price of any given stock must recover. It's generally expected that the stock market as a whole will recover, but that doesn't necessarily hold for any given stock.
If you decide to sell, there's of course a chance the price skyrockets right afterwards, and that won't feel great, but then neither will hanging on to a bad stock for way too long.
The fact that you have this question might indicate that you need to do some reading up on finance and stock trading before you start (or continue) trading individual stocks with real money. Stock trading is hard - there are plenty of things you need to know to be good at it (even if some people who know very little get lucky). Reading up on finance could also help you manage your money better in general.
It is commonly accepted that one cannot beat the index by significant margin. Basically this means that whatever stocks at whatever point of time you choose to buy, you won't reliably get better results than the average index of the market. Of course your results will vary, the more stocks you invest in the closer to average it will be.
Now: can you lose to the index? As far as I know, only by losing your money into brokerage fees or by investing in particularly non-liquid stocks, for example if some company is going bankrupt and no-one else would be buying that stock anymore.
Thus, even though it does sound smart to think out strategies and try to estimate the target prices for each stock, it does not seem to be that important for the end result. Just have enough diverse portfolio that you don't lose all your money in one failure. If you stop investing after one failure, there is no time for things to average out.
After all, whenever there is a lot of people selling and buying, the stock's price matches the markets average prediction of the stock's future performance. Sometimes your personal prediction will be more accurate, and sometimes less accurate, but on average owning any diverse set of stocks will be approximately equal to owning the index.
If you don't know WHY it's down then you are taking a blind decision.
But let's say that the chances of success are 50%. However, you are competing against other. If the others (such as brokers) have information (and they have), then your chances are less than 50%, ergo, you most likely lose money.
When you wait for a stock to recover, you are missing out on other opportunities. The mere fact that it went down doesn't mean it will recover any time soon -- if ever. In actuality, the decision to keep the stock is the same as if you were deciding to buy it for the first time today.
While I can't give you a surefire formula for making money, I can give you one for losing it -- check stock prices every day: if you see a stock is going up, buy it. If a stock you own is going down, sell it right away (or use a stop-loss order to do that for you).
The reality is that if a stock is going up, it will probably start going down again soon -- unless you got in on it BEFORE it's rise, you won't gain anything as the money is already made (perhaps by the guy who sold it to you). This is why many people complain that any stock they buy goes down. And if you're quick to sell a stock that's going down, you will probably sell at the bottom of the market.
When people react as above, that only increases it's volatility, leading to bigger price swings than the fundamentals would suggest.
I once worked for a company that IPO'ed. I bought some stock, then it went down. The "reason" was the dot-com crash, but my company wasn't really a dot-com, so I figured the loss in value was bogus. So instead of selling off, I bought some more. Then the price recovered, and then I sold it. Then the price went way down, I bought a ******** of it, it went back up again, and I sold it. I was able to early-retire then, as I was rich. (A good part of this was luck, of course. But the point is that what most people do is "buy high, sell low", which is the opposite of what they should be doing.)
Before you buy any stock you should already have your get out strategy worked, at what point will you get out. This is called your risk management.
Most brokers will allow you to place a stop loss order when you first place your buy order. You need to work out at what point will you take a loss, 5%, 10%, 15%, 20%. Basically if your looking to be in the stock for the medium to long term (months to years) you should choose a wider stop of 15% or 20%, allowing you to capture most of the upward movement in the trend, and only taking you out if the price really starts to dive. If the price continues to move up you can either manually move the stop loss upwards or you can set a trailing stop loss so it is always trailing the highest price reached by the percentage of your trailing stop.
No matter how amount of fundamental analysis you do to try to convince yourself that you made the right decision to buy and it is a good stock and it will turn around soon and come back up, the market doesn't care, the market will do what it wants, so listen to it, and if it's time to get out - get out.
