Losses can come in several ways. The most obvious loss, of course, is that your shares will take a big dip. In other cases, the losses are less obvious and may be less painful. With the necessary willingness and the right mindset, you can process those losses a little better.
There are several ways in which you can recover from a stock market loss suffer:
Loss of An Investment by Calculating Percentage
Price losses cost time and energy, the more pronounced the more. If a share suddenly loses 1%, a corresponding gain the next day easily compensates for it. Even a 5% loss only requires a 5% gain. From 10%, however, 11% is required. And at 20% it’s 25%.
At this point at the latest you can feel how the percentage calculation affects an investment. And that’s because of the base effect. After the setback, the stock has to work its way up from the then lower level.
Another numerical example to understand: If a share falls by 50%, it is of course listed at 50% of its previous value. If it increases again by 50% from there, it only compensates 75%. Because 50% of 50 is 25. For a complete compensation, the paper would have to catch up 100%.
The lower the price falls, the more it has to grow disproportionately.
Numbers Show Sober Facts
Trying to catch up on something can quickly turn out to be an illusion. At 100%, the end of the line would be reached anyway. Where there is nothing left, nothing can increase: total loss. In that case it is like the lost fifty in the wallet mentioned at the beginning: it has to be completely replaced.
In order to avoid losses, you can of course try short-selling strategies that benefit from falling prices in reverse and in reverse. This works with short certificates on individual values such as stocks as well as with short ETFs on an entire index. Anyone who has dealt with this may know the risks of constructing a short sale .
Base Effect is the Short Hedge Limits
Because the development of a short ETF on the Dax is not 100% a mirror image of the regular Dax and continues to deviate every day. The reason: Short products replicate the value development every trading day. And because each time you have to calculate from the new level, this basic effect causes a divergence.
If the Dax falls by 2% on the first day, then rises by 1% and falls again by 3% on the third day, there is a minus of 2%.
This is different with the Short-Dax: On the first day, it increased by 2% in reverse. The next day, however, it continues from the lower base of the closing price from the previous day. Because this basis is changed every time, deviations occur over time, which requires constant readjustment.
Investing in stocks? Check our copy trading recommendations.