Categorized | Stock Trading

Bloodletting in Investing

In stock trading or other investments, bloodletting refers to a period characterized by intense investment losses. This phenomenon can take place in the course of a bear market when the value of securities in several sectors is likely to depreciate heavily and rapidly. Blood letting concept is derived from a historic medical practice where physicians employ cuts or leaches in draining some of the blood of a patient, on the premise that balancing the humors when feeling ill is a ‘healthy’ thing to do.

Bloodletting in Stock Trading

Stock traders in a bear market are presented with two options; selling off their investments as a way to tone down losses, or riding out the slump and clinging to their investments. The choice to dispose of a particular security may lead to increased decline in the value of such security since the sellers available in the market are more than the buyers. At the same time, investors who perceive the downturn will reverse eventually are likely to engage this period to their own benefits by buying up bargain stocks.

What You Should Know

In the investment world, bloodletting is almost unavoidable since there are forces behind the scene facilitating such economic downturn periods. As much as it is essential to understand the business cycle, it is even more beneficial if such understanding is intended to improve portfolio returns. So, what should you do in recession as an investor? Sorry to say, but there’s no easy answer to this question, it all depends on your circumstance and the type of investor you are.

The first thing to put in mind is that you can still find ways to make money in a bear market. Some are likely to short sell stocks during a bloodletting period. However, this does not yield maximum profit since the stocks are underpriced at this time. This technique poses several unique pitfalls and therefore should be used minimally and only by savvy investors.

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