Permanent loss of capital

Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.

Example

A company going bankrupt and its shares going to zero, as opposed to a stock that fell 40% and later recovered.

Important

This, not day-to-day price movement, is the risk that actually matters over a long time horizon - and selling during a decline is what most often turns a temporary drop into a permanent one.

Related terms

• Risk — The chance that an investment's actual outcome differs from what you expected, in either direction.
• Volatility — How much and how often an asset's price moves, up or down, over a given period.
• Drawdown — The decline from an investment's highest point to its lowest point before it recovers.

Lessons that explain it

• A round trip through an auction house can cost 40 percent before the item has moved at all — Buyer's premium going in and seller's commission coming out compound into a breakeven hurdle most buyers never calculate - on top of holding costs and, in several jurisdictions, a higher tax rate reserved specifically for collectibles. This lesson is general information, not personal tax or legal advice, and rules vary by jurisdiction. (13 min)
• Total loss is an outcome here, not a tail — Four separate routes lead to zero, none of them exotic. Then the volatility arithmetic, the costs nobody totals, and a tax treatment that can leave a bill in currency against a position that has already fallen. (13 min)
• A sized bet, renewed on purpose — If it belongs anywhere, it belongs as a position small enough that a total loss is survivable - and the diversification argument most often used to justify it has a habit of failing in exactly the weeks it is needed. (9 min)
• Why diversification works — Spreading money across many holdings does not raise your expected return. It changes the range of outcomes around it - and in particular it removes the ones you cannot come back from. (11 min)
• Illiquidity: when you cannot get out — A price you cannot transact at is a quote, not a value. The losses here come from needing money at a moment when the asset will not give it back. (9 min)
• Concentration: one thing going wrong — Concentration is how fortunes are made and it is how they are lost, and the two facts are the same fact viewed at different times. (10 min)

All 578 terms in the Investing glossary