Let's say that a stock drops 10% one day, goes up 10% the next day, then drops 10%, rises 10%, drops 10% and finally on the sixth day, goes up 10%. Did you break even? If you said yes, you would be wrong, Your investment would be down to 97.03% of its original value.
For most stock traders, this information is second nature. However, there are a lot of new investors and 'mathematically challenged' investors and traders who have a difficult time understanding this.
But it is necessary to know because this is why so many stock market experts say it is so important to limit your losses as much as possible.
Here is an example that's easy to understand. You invest in a stock that sells for $100 per share. The stock drops 50% to $50 per share. The stock would have to increase by 100%, or in other words, it would have to double, to break even. So a 100% increase to make up a 50% loss.
If you need assistance calculating the recovery percentages, you can check out the Stock Recovery Analysis at 18stocks.com.