Navigating Shareholdings: What to Do With a Losing Position in Union Bank of India
Investing in stocks is a complex and multifaceted endeavor, and it's not uncommon to find oneself in a position where the share price of a holding is consistently below the purchase price. In this case, a reader asks whether to exit Union Bank of India (UBI) shares with a substantial loss or hold onto it in hopes of recovery. The key questions are: should one add more to the losing position, cut losses, or seek alternative opportunities with better prospects? Let’s explore these options in detail.
Current Situation
The reader currently holds 100 shares of Union Bank of India at an average cost of 106, but the shares are now trading at 29. This represents a significant loss, especially in percentage terms. The reader is considering either adding 500 more shares at the current price or exiting the position.
Adding More Shares to Alleviate Losses
Adding more shares at the current price with the hope of bringing down the average cost can indeed be a strategic move. If you invest an additional 500 shares at 29 per share, your new average cost will be:
(100 * 106 500 * 29) / (100 500) (10600 14500) / 600 35100 / 600 ≈ 58.5
This means your average cost per share would drop to around 58.5. While this does provide a cushion in case the stock price drops further, it also means that if the share price recovers to 106, you would benefit more because your new average cost is much lower. However, it is important to consider the time frame and the outlook before making such an investment. Given the current market dynamics, this strategy might be worth considering if you believe the stock could rebound to the 58 level within the next 3 years.
Exiting the Position and Moving On
On the other hand, selling the shares and considering an alternative investment like Yes Bank at the current price of 12 could be a better option. Yes Bank is currently a more attractive prospect, especially if you are looking for a quicker recovery and more certainty. The risk of losses is also lower if you sell and invest in a stock that is more resilient.
Long-Term Perspective and Current Market Environment
The holding period for the UBI shares has been relatively long, and the decline in share price has not only been due to the global pandemic but also the underlying issues in the broader banking sector. The ongoing banking crisis has affected not just Union Bank of India but the entire banking sector, indicating fundamental issues that may not be easily rectified.
Given the dire market conditions and the lack of recent chances for recovery to the original purchase price, it may be more prudent to recoup some of your current investment in a more promising stock, such as Yes Bank. While there is no guarantee of recovery, the recent trend in the market suggests that investing in stocks with better fundamentals and growth prospects might offer a higher chance of success.
Conclusion
The key decision-making factor here is weighing the potential benefits and risks of each option. If you feel confident in the resurgence of Union Bank of India, adding more shares at a lower price might be a viable strategy. However, if the market conditions suggest a prolonged downturn, selling the shares and moving to a more promising investment might be the prudent choice. As always, it is essential to conduct thorough research and consider all the factors before making any investment decision.
Ultimately, the goal should be to minimize losses and maximize gains by making informed choices based on the current market conditions and your long-term financial goals.