What happens if my stock goes negative? If my stock goes down, do I owe money to my broker? When do I need to start selling my investments?
If these questions sound familiar, here’s everything you need to know about stocks, bonds, mutual funds, and more – before you start investing.
What Happens When Your Stock Goes Down?
Stock prices can descend for numerous reasons, from major scandals to announcements of layoffs to poor financial quarter performance. And when stock prices decrease, the total value of an investment drops, too.
Stock Price Decline Example
You bought one share in Company ABC at $10, and the price decreased to $8 over the course of a week. That means the value of your stock decreased by 20%. If the stock market is down and the investment price drops below your purchase price, you’ll have a “paper loss.”
The opposite is also true: If the stock price increased to $12 per share, the value would increase by 16.67%. If you hold the investment when the price goes up, you’ll have unrealized gains on an investment that has yet to be sold (also known as “paper profit”).
After you sold the investment off, you’d either reap the earnings from the gains or get back less than you invested from the loss.The more stock you own, the more your value would decrease or increase as the price changes.
Two of the most common conditions that affect the value of your investments are bull markets and bear markets.
Bull Markets vs Bear Markets
A bull market refers to a period with a 20% increase in prices (from the most recent low) for the Dow Jones Industrial Average, S&P 500, or another major index. This increase can be driven by a number of conditions, including increased sales, rising consumer confidence, or optimism towards a productive economy. During this time, investors often enjoy increased earnings and tend to hold stocks until they reach a target price.
In a bear market, however, market prices experience a long drop of at least 20%. Bear runs can be caused by negative market indicators such as contracting economic conditions, job losses, and investor sell-offs.
If My Stocks Go Down, Do I Owe Money?
For new investors, one of the most common concerns is related to the value of their investments.
If your stocks, bonds, mutual funds, ETFs, or other securities lose value, you won’t normally owe money to your brokerage. However, you may not receive all of your money back if/when you sell. It really depends on whether you’re buying stocks on a margin loan or with cash.
Selling Stocks on a Margin
More experienced investors may use more complex strategies (like buying stocks on margin) to increase their purchasing power. In this case, if the value of stocks in your account goes below the maintenance margin, your broker will require you to sell some of the stock – or add more cash to cover the shortage. This is a much riskier strategy for new investors.
Selling Stocks at a Loss
If you decide to sell your investments at a price lower than what you paid, you’ll experience a realized loss. Smart investors occasionally “cut their losses” if they’re afraid that the stock price will drop even further. In other words, if they buy a stock and it goes down, they are expecting to lose as little money as possible.
Other investors may decide to hold on to their investments in the hopes that they’ll increase. The idea that industries will naturally increase and decrease in value is the idea behind Dow’s Theory (which we explain in our Ask an Expert section below).
Will My Stock Prices Go Back Up?
So if your stock goes down, is it time to re-evaluate your sales strategy? Should you hold onto the stock and wait for a bull market?
Unfortunately, there isn’t a universal answer. Every situation is unique and investments can gain or lose value at any time. When determining whether it’s time to buy or sell, use all of the available tools and resources possible.
1. Track Your Investment’s Value Online
While investing platforms provide tools, consider downloading apps that help you track prices and changes in real time. The PageOnce and Bloomberg apps are among the best personal finance apps to help you track your investments online.
2. Stay Current with Financial Information
It’s natural to wonder what happens when a stock goes negative. Be sure to read the financial news, prospectus, and research available about your investment.
It’s also important to understand the eight key facts of investing, including a company’s business model, competitive advantage, and profit margin. This knowledge will help you make wiser decisions about your investment plan, as well as decisions that protect and increase your stock portfolio’s value.
- Create a retirement savings goal
- Design an investment plan to reach it.
- Get a professional money manager to continually monitor and rebalance your portfolio
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