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4 Things to Consider if Your Stock Drops in Price

Now and then, I would receive a question like this: “I bought a stock, and its price has dropped. What should I do?”

In most cases, I sense restlessness, anxiety and doubt from the person who asks the question. If you have the same question, let me assure you that it is not the end of the world. In some cases, it can be a blessing in disguise.

Here, I will share four things you can consider immediately if your stock drops in price.

Check its Financials

Regrettably, most investment mistakes could have been easily avoided if investors had read the stock’s annual reports.

If you have bought shares without checking a firm’s financials and have incurred losses on them, it is wise to take this as a learning opportunity.

You may start by looking at the financials to check whether the businesses you own are profitable or not. If you find that your companies have reported losses and are still incurring losses, perhaps, it is wise to sell those shares and move on by finding businesses which are consistently profitable.

Check its Valuation

Sometimes, investors may suffer capital losses despite investing in businesses that are consistently profitable. Why? This could arise if these shares were bought at high prices. In this case, you may want to calculate the stock’s price-to-earnings ratio, price-to-book ratio and its expected dividend yield at your purchase price.

You might discover that you have overpaid for your stock. You may then want to check the stock’s current price. If it has become cheaper and more undervalued, you may consider buying more shares.

Shouldn’t I Cut my Losses?

It depends. For most people, the two points mentioned above is more than enough to point out the reasons for losing money in the stock market.

If you reckon that a stock is a good investment at a certain price, isn’t it logical to think that the same stock is an even better investment if its price has dropped? Thus, it makes no sense to think that a great stock has turned into a lousy investment just because it falls in price. Foolish investors would take this chance to accumulate more of these excellent shares at low prices as stock investing is a method to build long-term wealth.

But, I’m Not Comfortable …

Perhaps, you may find the above a little scratchy as you are not comfortable with buying more shares of the same company with dropping prices. It is okay if the stocks you are holding are lousy companies.

More importantly, I think, if you have difficulty accumulating more shares at lower prices, you should reflect on your reasons for buying these stocks in the first place. Were you buying them on impulse? Or, do you really have a game plan on stocks before investing? Most buy stocks out of greed, gut-feel, and speculation. How about yourself? Perhaps, soul-searching would be helpful to you.

The Foolish Takeaway

The above consideration makes sense only if you are committed to becoming a profitable stock investor. If you choose to be a short-term trader, your game plan would be entirely different.

Hence, if you find that your stocks have fallen in prices, it can serve as a perfect time for you to go back to the drawing board to find out why do you do what you are currently doing and improvise from there.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.