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Cost of doing business
The flip side of the last news letter on buying is, of course, selling stocks. You must first realize that there are two catagories of sells. The first is short term and the second is long term. This is strictly a factor of the time you hold a stock. The dividing line is 365 days. The difference between the two is the tax rate of your gain. If you keep a stock less than a year, the gain (assuming you have a gain) gets taxed at your current bracket. If you hold a stock for more than a year it gets taxed at around 15%. This was put in place to add stability to the market. If people didn't have this tax rate in the back of their mind, the market would be a lot more unstable. For more on short and long term gains check out This Another thing you need to keep in mind is the fees that are involved with your buying and selling. If you are a small time invester, especially, this can whack you pretty good. For this discussion, I'm going to take taxes out of the equation. If you buy stock A for $10 a share, and get 10 shares; your total cost is $100. (I realize this is a low number, but it is for illustration purposes only.) Now you add the trade price; on E-trade that is $12.99. So instead of $10 per share, you have paid $11.29 per share.
So here you are a year later deciding to sell this stock, and the price is $12.50 per share. That is a 25% gain. Nice trade, smart move. Or is it? When you sell the stock, you get hit with the same trade cost of $12.99. So we actually paid $11.29 per share, so the gain is not $2.50 but only $1.21 per share. When you add in the cost of the sale, it is even lower. Check out the table.
So after a year you have $99.10 instead of $100. This is obviously an exagerated case. But even if you would add another 90 shares and say you bought 100 shares, the impact dolalr wise is still the same. You r profits are minimized by the cost of the trades. The only difference is in the percentages. In the "buy" portion, the added trade cost makes the price per share $10.13 ($1012.99/100 = 10.129) and likewise on the sell. The sale price is $12.37 per share. The profit in the 100 share scenario is $224.01. This is a pretty simple concept, but one that people can overlook when they are trying to make "quick cash." Last year I paid $467 in trade fees. If I had a small portfolio, that could be a huge percentage, and could wipe out any profits I might have made.
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Want a scholarship into the Millionaire Mind Intensive worth $2590? http://www.secretsofthemillionairemind.com The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy copyright Robert E. Britt 2006 |
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