Drawdown

A drawdown is the peak-to-trough decline in a stock's price from its highest point to its lowest point before recovering. Think of it as how far down an investment drops from its best moment. You'll hear about drawdowns when analyzing risk—they show you the worst-case scenario you might have faced if you bought at the absolute top. A 20% drawdown means a stock fell 20% from its recent high. Drawdowns matter because they help you understand volatility (how much a stock bounces around) and prepare mentally for rough patches. If a stock has a history of 40% drawdowns, you know big swings are normal for it. It's different from a loss—you only lock in a loss if you sell during the drawdown.