What is Holding the Bag?
An investor is left 'holding the bag' when his or her investment has gone from valuable to worthless or almost worthless.
How Does Holding the Bag Work?
Let's assume that John invests $10,000 in NewCo, Inc. NewCo develops its first product and takes it to market, but the product bombs. NewCo is quickly running out of cash, so it sells assets, lays off workers and downsizes considerably. It misses several debt payments and damages its credit rating, making it very hard and expensive to borrow more money in the debt market. Eventually the company files for bankruptcy. It sells its assets to repay creditors, leaving shareholders with virtually nothing.
If John held his investment all the way from $10,000 to $0, he has been left 'holding the bag.'
Why Does Holding the Bag Matter?
Nobody wants to be left holding the bag, but there are plenty of ways investors can become bag holders. Investors must take reasonable precautions when they buy investments, like reading financial statements, listening to conference calls and identifying the red flags that indicate it's time to sell.
