For an experienced participant in the market, suffering a monetary loss is still minor, even though making money is the primary reason for a participant to stay live in the market.
First, it is eminent to understand Market Loss, they come in two ways:
Immediate: The market collapse down like no tomorrow.
Slow: The loss can be subtle, where the markets gradually drop in price over a period of time.
Here losses come in different forms. The only way to get away from such losses is to prepare and learn from the painful lessons, which would certainly help us become a better investor.
With the right mindset and a heart willing to learn, we shall learn how to deal with the different losses in the stock market. You need to learn stock portfolio management to lower your risks. It is about building and overseeing your stocks that will meet your long-term goals and minimize your portfolio risk.
This may not sound that intense emotionally, but it is actually very painful for your wallet.
Let us understand this with an example if you have Rs. 5k right now, which you have kept away or locked in the safe and a year later you hold that Rs.5k in your hand and tell yourself, “Well, at least I didn’t lose anything.” But that’s not true.
You stashed up Rs.5k of your money for a year and you received nothing in return. If you had piled your money elsewhere, such as in a certificate of deposit (CD) instead, you would have earned at least a little bit of interest during that same year. This is known as the opportunity loss.
When a stock is consolidating (sideways moment) or doesn’t even match the lower-risk return of a bond, you’ve experienced an opportunity loss—the chance to have made more money by putting your money in a different investment. It’s basically a trade-off that caused you to lose out on the other opportunity.
If your investments don’t act as planned and are in a major loss, you should decide what to do about it. If you believe the company’s long-term prospects are still good and you’re a value investor, it might be a fine time to add to your holdings.
In the paper loss, the loss is just on ‘paper’ and not in the pocket yet.
Therefore, your paper loss will become an opportunity loss if the stock continues to underperform.
Missed ‘Profit’ Loss
This type of losses usually waves in when greed takes place of discipline or when the stock gains back its levels after a significant run-up, which a characteristic of a volatile stock. You might feel that the money you could have made is lost money—money you would have had if you had just sold at the top.
Many investors sit tight and hope the stock will recover and regain the high, but that might never happen. And if it does, some investors may be tempted to hold on again, hoping for even greater profits, only to see the stock stage another retreat. The best stock market advisors would tell you that the best cure for this type of loss is to have an exit strategy in place—and to be happy with a reasonable profit.
As the name suggests this the simplest and perhaps most painful type to understand. You buy a stock and then watch the price go down and stay down. At some point, you decide to end the pain and sell it. This kind of loss is called a capital loss because the price at which you sold a capital asset was less than the cost of purchasing it.
You can use a capital loss to offset a profit from selling a capital asset, which is known as a capital gain, for tax purposes. It is characterised as short-term if you owned the asset for one year or less. If you owned the asset for more than one year, the loss is considered to be long-term.
Dealing with these Losses:
No one wants to suffer losses of any kind. The best course of action is often to cut your losses and move on to the next trade.
After you’ve taken a loss in the market, turn it into a learning experience that can help you going forward.
Analyse your choices: Review the decisions you made with new eyes after some time has passed. What would you have done differently in hindsight and why? Did you follow stock portfolio management principles? If you had acted differently, would you have lost less or perhaps nothing at all? Answering those questions may help you avoid making the same mistake twice.
Recoup what you lost: Tighten your financial belt for a while if you must and if the loss is small enough, you may be able to recoup it with a little discipline. Regain that money and then try again, keeping in mind the things you learned for the next time the market gets shaky.
Don’t let losses define you: Keep the loss in context and don’t take it personally. Remind yourself that a lot of other people out there took a hit just like you did—perhaps even more of a hit than you did. The loss doesn’t define you, but it can make you a better investor if you handle it correctly.