Holding Loss
A holding loss refers to the decrease in the value of an investment or asset over a certain period during which it is held by an investor. It is essentially the amount of money that an investor has lost due to a decline in the asset’s market price.
For example, if an investor buys a stock for $100, and the price of that stock drops to $80, the investor has a holding loss of $20.
It’s worth noting that a holding loss (or a holding gain, its positive counterpart) only becomes a ‘realized’ loss or gain when the asset is sold. Until then, the loss (or gain) is ‘unrealized’ and can change as the asset’s market price fluctuates.
Also, the holding loss doesn’t only pertain to the capital value of the investment, but also the opportunity cost of holding the investment which is not performing as expected.
Example of a Holding Loss
Let’s walk through an example of a holding loss.
- Let’s say you purchase 100 shares of a company called “TechCo” for $50 each. The total investment comes out to be $5,000 (100 shares x $50).
- After some months, TechCo’s stock price falls to $40 per share. The current value of your investment is now $4,000 (100 shares x $40).
- The difference between the initial investment ($5,000) and the current value ($4,000) is $1,000. This is your holding loss because it’s the amount you’ve lost on paper by holding the investment over this time period.
Remember, this is an ‘unrealized’ loss as long as you continue to hold the stock. If you sell the stock at this point, the loss will be ‘realized’. If the price of the stock were to rise before you sell, the holding loss could potentially decrease or even turn into a holding gain. Conversely, if the stock price continues to drop, the holding loss could increase.
