Introduction
Bag holder is an informal term which describes investors holding a position in assets that reduce in value until it becomes entirely worthless. Generally, the bag holder doggedly holds on to their holdings for an elongated period during which the asset's value goes on to plummet to zero, thus making that asset go worthless eventually.
Example
Bag holders are those investors who hold bags of stocks that have lost their worth over time. Consider investors purchasing 200 shares of a recently established startup. Even though the share price shoots up during the times at which the investors are subscribing to the initial public offering (IPO), it swiftly begins going down.
The following poor earning of revenues indicate that the firm is not thriving and the share price eventually starts plummeting. That investor who still holds on to the price even after seeing the poor run of things in the company is termed as a bag holder.
Origin
As per the Urban Dictionary, the origin of the phrase 'bag holder' dates way back to the times of the great depression. Back then, the people who were standing in the queues of the breadlines and soup kitchens were holding potato bags. This term has now emerged as a part of the modern investment dictionary.
Effect of Disposition
There are three significant reasons for an investor to hold on to the underperforming assets. The first of them is a possibility of completely neglecting the portfolio and thereby missing to eliminate the underperforming stock.
The second reason, the investors are going to hold on to their position as selling the underperforming stocks mean that they have made a nad investment decision.
The third, the investors will sell their holding when the price starts going up. They will continue to hold on to it even when the price is dropping. They like to win and are ready to wait until things fall back in place.
