Just as a chat subject I wondered how people viewed the “cost” of an asset in their portfolio where they have traded it.
So if you buy shares at $100/share and then sell them at $120 to buy back at $110 do you consider the shares you then hold as costing $110, $100 or $90.
I hear lots of mention of averaging but generally not in the context of trading the shares. Many seem to just consider it as buying initially at $100 and the price goes down so they buy more at $80 creating an average cost of $90 but having had to double their holding.
I have some companies that I hold long term but if the price gets to a high where I think it will pullback I often sell part of my long term holding and just place a limit order to buy back lower. Even if I don’t try to catch the bottom of any dip I can still either take a bit of profit (ie buy back the same quantity of shares) or accumulate additional shares (ie buy back based on the value - sell and buy are for same £ amount incl commission/fees). If the price dropped 5% I don’t really care if I set my buy at a 3% drop and didn’t get 2% of the drop I still increased my shares by 3% (or effectively got a 3% dividend)
For Capital Gains Tax purposes Dougal would be correct.
…but, I tend to go by my initial investment capital. If i invest £1000 in a stock and sell for a profit and reinvest at a lower price, i still tend to go by if the value of the stock is still worth more or less than that initial capital. I don’t tend to count profit as capital until its invested in a different stock. That way i don’t put so much emphasis on my average.
I think investing has a lot of mind games. Maybe its how we perceive or cope with risk?
@MaxZorin and @Dougal1984 thank you for your replies. I just thought it was an interesting issue in terms of what different people’s perception is. As you say, for CGT it would be the $110 putting aside B&B rules.
I also look at what my cost is and value it on that basis. Trying to keep track of individual prices paid gets hopelessly difficult when you have multiple buys and sells over a period of time. I therefore guess my own way of thinking about it is similar to Max
$110. That’s what you parted with to get the stock. Any previous transaction is sunk.
That said, it depends what period you are talking about and what your original intention was. If I’d put a set amount of money in with the intention of day/swing trading to average down a price then I’d maybe consider things differently, but that’s not my strategy