Here's What Happens When a Stock You Own Loses Value

Opening a brokerage account and investing in stocks is a great way to grow wealth over time. The stock market has, over the past 50 years, generated an average annual 10% return, as measured by the performance of the S&P 500. This means that if you were to put $2,000 into a group of S&P 500 stocks or ETFs today, your portfolio might be worth about $235,000 50 years from now.

Ideally, your goal in buying stocks is to see their value rise over time. But there may come a point when a stock you own loses value.

Stock values can fluctuate a lot based on various factors. A general stock market downturn could result in a stock you own losing value. Or you might see the value of a stock of yours decline following a lackluster earnings report or other negative news pertaining to the company itself.

Seeing a stock you own lose value isn't really something that should throw you for a loop. That's because if you play your cards right, you may not actually lose any money at all.

It pays to stay calm and ride things out

You might buy 10 shares of a given company at $100 apiece for a total of $1,000. The value of those shares might drop a few months later to $90 apiece, or $900 in total. If you were to sell those stocks at a value of $900, you'd lose $100. But guess what happens if you don't sell? Nothing.

If you sit tight when the stocks you own lose value and don't unload them, you won't lose a penny. Remember, when you see a stock's given price, it represents what it's worth at that moment. But if your plan is to hold onto your stocks for many years, then frankly, it shouldn't matter what the value of your stocks is today, tomorrow, or next month.

Let's say you're 35 years old and have built a stock portfolio that you hope will serve as your retirement nest egg. Your portfolio might take a major hit when you're, say, 42. But if you're not planning to retire until age 65, that gives your investments 23 years to recover. That's a really long time. So not only should you not sweat a decline in the value of your stocks, but you also shouldn't take action when that happens unless it makes sense to do so for tax loss harvesting purposes.

When it pays to sell stocks at a loss

For the most part, it generally pays to ride things out when the stocks you own lose value. But there can be exceptions, such as if you're strategically opting to take a loss for the purpose of tax loss harvesting.

With tax loss harvesting, you intentionally take a loss in your portfolio to offset other gains. It's a strategy that could make sense if you're sitting on gains in your brokerage account and you want to reduce the tax hit.

So, let's say you sold some stocks earlier this year at a $500 profit. You're going to have to pay the IRS taxes on that sum. If you're able to take a $100 loss in your portfolio by unloading some of your stocks when they're down, you'll reduce your taxable gain to $400.

But unless you're dumping your stocks to reap tax benefits, you generally should not sell when their value declines -- especially if you believe in the companies at hand and have reason to think they'll recover in time. It can definitely be disheartening to see the value of your stocks drop. But if you wait things out, there's a good chance you'll come away not only financially unharmed, but ahead of the game.