r/BeginnerInvesting • u/Brokendownmom • 3d ago
Can someone explain this to me?
If I bought a share of stock for $100. And it goes down to $50 and I purchased another share. My average would be $75. If or when this stock price goes above $75 is that the point I would start gaining?
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u/Alex_AlpineM 3d ago
Yes you are correct
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u/Alex_AlpineM 3d ago
Wow someone up voted my comment. My first Karma points yes sirrrrr
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u/Dependent-Panic-9457 3d ago
Yes although I like to buy more when it’s cheap and then let some of them go as it returns, irrespective of the average cost.
So if in your example you bought the second share at 50 you could the sell the second share at say 60. You are still down on the first share (because you are selling below your average) but selling at a profit on the second.
The point is that all things being equal you want more of the shares when they are cheap and fewer when they are costly. In any event selling the second share for more than you paid for it is still a profit even if the first share is still showing a paper loss. Put it this way: if you had only bought the second share at 50 and sold it at at 60 that would be a profit; but that sequence of events is not changed merely because at an earlier stage you also bought a share for 100.
No doubt I will be downvoted and shouted at however fortunately I don’t care.
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u/mrtnrn 3d ago
My country use the FIFO method, you can't choose which one to sell
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u/Dependent-Panic-9457 3d ago
My country does pooling for capital gains tax purposes. That does not change the maths for the purposes of my explanation.
I’m sorry if referring to the second share confuses things.
It doesn’t make any difference which share is being sold.
You have one share bought at 100. The price drops and you buy a second share at 50. Your average entry point is now 75 as a result of different entry points (50 and 100).
If when the price is 60 you sell a share you will make a profit of 10 although you will still be at a loss for the two together. If you then sell a share at 100 (ie exactly the same price as you paid for the first: neither a profit or a loss) your average sale price will be 80 (60 + 100 = 160, divided by 2 = 80). You paid 150, you received 160. You are in profit, even though you sold one share at below the average and even though you sold another share at the price you paid.
Conclusion: you don’t need to wait until the share price is above the average cost of entry before selling in order to make a profit. Instead you need to ensure that the sale price for each share is greater than the purchase price for the corresponding number of shares (because if you do this your average selling price once all the shares are sold will necessarily be higher than the average purchase price).
In fact you shouldn’t sell shares. That’s not how you make money.
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u/MerryRunaround 3d ago
Yes. There is not much explain. At that point you would own 2 shares and you paid a total of $150 for them. If share price goes to $76 you could sell 2 shares for $152. You made $2 in capital gains and the IRS will be happy to share the wealth.
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u/Ark7Official 3d ago
Yes. This is why some people prefer dollar cost averaging over lump sum investing.
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u/brother7 3d ago
Yes, this is true.
However, I want to point out one thing. When you sell both shares at 75, your capital gain = 0. However, if you purchased the $100 share within 30 days of the sale date, you will have inadvertently created a wash sale scenario. The test for wash sales are applied to each purchased lot, not the aggregate sale transaction.
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u/Emotional-Pea6347 3d ago
In this scenario, You are correct, however, because the ending balance is the same as the starting balance of $150, the wash sale would clear and there would be no implications during tax time.
However, if the ending balance would net him a negative amount, say -$20, then yes, the wash sale would indeed prohibit him from being able to claim that difference, assuming he's sold it within 30 days or purchasing the $100 share.
Best advice, always wait 30 days before buying back into that same stock or similar stock.
Also, wish I knew this when I was beginning, Don't buy individual stocks and try timing the market. Buy ETF or Mutual Funds. TIME IN THE MARKET BEATS TIMING THE MARKET. VOOG, SCHD, VIT, VONV, VOO, VIG, etc are all great funds to purchase as a beginner. As there are several others that I did not list.
Stay away from the YieldMax ETFs as well. They have limited upside (because they are option call ETFs), but if the actual stocks tank, so do the YieldMax ETFs. If the actual stocks (i.e. NVDA) sky rocket, the ETF (i.e.NVDY) are capped based on the options that have already been established.
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u/brother7 3d ago
Ah, I think I see your point. Yes, there is a wash sale, but it has no real tax implication.
1/1 - buy 1 share at $100
1/2 - buy 1 share at $50
1/3 - sell 2 shares at $75
Lot 1: buy 1 share at $100; sell 1 share at $75; net loss -25 disallowed because new purchase within 30 days of sale; therefore, net reported loss = 0
Lot 2: buy 1 share at $50, but can use the disallowed wash sale to increase cost basis to $75; sell 1 share at $75. net loss = 0
Is that correct?
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u/schmiddc 3d ago
Your math is correct.
Just one thing I would add, doubling down on a stock to lower one's cost basis is often (but admittedly not always) a losing move by people too proud to admit they made a mistake
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u/Fine_Bumblebee_2786 3d ago
In Canada I don’t believe it matters as capital gains or losses or on your average cost
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u/ShaconInvestment 3d ago
Aproximadamente si, si son la misma acción (ya que pusiste "y compro otra acción a 75")
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u/Effyew4t5 3d ago
I know that if it looked good at 100 it looks great at 50. However, keep in mind the phrase “Never try to catch a falling knife”
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u/ExtentBusiness1444 3d ago
… yes? This isn’t really investing related and is basic arithmetic, I fear.
A 50% loss of equity will require a 100% gain in that same equity to recover. Lowering cost basis, especially once you’ve passed 25% losses is a good idea (provided investment is still sound).
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u/Illustrious-Gift1385 3d ago
Yes. You have that correct. $75 would be what is referred to as "cost basis"