“Until you sell the failing stock, you’ve both gained AND lost money” — Erwin Schrödinger, in 2020 after downloading Robinhood.
Say you buy into a company, let’s call it Financial Acquisitions, Investments, and Loans, or $FAIL, at $10 but it goes down to $5. If you sell, you lost $5. But if you hold on to it, you haven’t actually lost money. We know this already.
Now, let’s say that $10 stock goes down and never comes back up, but you buy ANOTHER share while it’s down at $5 — now it’s like you have 2 shares for $7.50, you’re only down $2.50 now, though there’s two shares, so it’s still the same $5, see how that works?
…unless you keep holding.
This is where the good stuff comes into play: You hold that stock, and it keeps going down, so now, it only has to drop $2.50 to lose another full $5. By doubling down on the failing stock, you’ve actually doubled your loss, pretty impressive, right?
But wait, there’s more: Now it’s down to $2.50/share, so what do you do? Buy TWO shares. Now you’ve leveled off at 4 $5 shares. Are you still following? Cause it’s about to get even better!
Let’s say it drops another $1.50. We’ve got 4 shares at $5, and the actual price is down to $1, about to get de-listed. So you buy a BUNCH more, really double down even harder [that’s double down figuratively, not literally, as we’re talking way more than twice as many shares]. You buy up 10 shares for $1 each, which now puts you at, I don’t know, like around $2.14 per share, 14 shares.
Now it gets FUN!
$FAIL is in danger of getting de-listed, so they reverse split. Now the value pops up to $4, giving you 3.5 shares at $8.56 per. Wow, you’ve circled back around to almost exactly where you started, except with a lower cash value. If you sell now, you will have increased your losses by doubling down on the terrible stock you bought in the first place, a true $FAIL.
Oh, by the way, I used nice round numbers like 10’s and 5’s for this, but in real life you should be dumping $10,000 and $5,000 into stocks to really up your game — gotta raise the stakes if you wanna raise the losses!