| Say you want to invest $2,500 in stock XYZ. You see that XYZ closed at $24, and everything is where you want it to be
from a technical perspective, so
you decide to put on the trade.
The first thing you want to do is subtract the TRADING COSTS or commissions that you will
incur to open AND close the trade when you are ready to exit.
For your example you are using $29 for each direction, in and out so you will take the
portion of your hand that you are going to trade ($2,500) and subtract the total
commission costs of $58 from it.
You now have a working amount of $2,442 with which to purchase your $24
stock.
You're not sure how much it is going to cost as you are going to place an open order to
trade At the Market when trading begins.
[ This is known as a Market Order and you will be traded at the price being Bid when the
market opens.
As you become more familiar with the markets, you will learn how to use Limit orders and
Stop orders, but for this example, you will simply be using a Market order. ]
Back to our trade at hand ...
You believe that XYZ will open close to where it closed because:
(1) of the market it trades on
(2) the volume that is present
(3) the stock's past trading history based on a daily business
You will now divide your $2,442 by the $24 to see how many
shares you can buy with what you have after you pay your commissions to get in and have
your exit commissions calculated so you can pay to get out.
I generally give myself some room to work in case the stock opens high as I do not want to
have to add more money to any account to cover a purchase.
I would figure something like 24.5 instead of 24 even and then divide my $2,442 / 24.50 to
find that it would buy me 99.67 shares of this stock.
I would then further round that figure down to say 95 shares and submit my order.
If I am filled high, I could go as far as high as $25.75 ( a full $1.75 above where I hope
it fills ), and still have cash to cover it.
If it fills where I am hoping for ($24) then all is well and I have a bit of cash in the
account - no biggie.
Now lets say that it fills at $24.25 and lets see what we do with this.
We now bought 95 shares at $24.25 per share, AND we have a total cost to enter and exit of
$58 when the trade is over.
So we calculate our total at ( 95 x $24.25 ) + $58 = $2,361.75 for our total cost to buy
those 95 shares.
Now we need to know what our Break Even Point (BEP) is so we can calculate from that one
point rather than figure in all of the other factors all the time to determine where we
are relative to the closing price each night.
To figure that BEP simply divide the total ACTUAL cost by the number of shares you bought
to see what EACH share actual cost you.
You paid $2,361 for 95 shares, or $24.85 which we will round up to $24.875 (24 7/8).
This price of $24.875 is your Break
Even Point.
If you were to sell your shares at this price, your entire costs of the original
purchase plus the cost of the entry and exit commissions would be completely covered.
Anytime you want to know where you stand, you simply divide
the closing price at the end of day by your BEP and that is the only calculation you need
to do.
Example:
Close $21.125 ... you are DOWN by -15% ( 21.125 / 24.875 = 0.85 which is 15%
LESS than 1.00 )
Close $27.375 ... you are UP by 10% ( 27.375 / 24.875 = 1.10 which is 10% MORE
than 1.00)
Now then, when you review the Survival rules, you will see that you do not want your
commissions to be more than 3.12% or something like that. The less the better.
Your ACTUAL cost is simply the purchase price plus the total commission so all you need to
do to find what percent your commissions make up is divide your ACTUAL costs by the
purchase price.
In this example, it would be $24.875 / $24.00 = 1.0364583 where here you can see that your
added commission costs were 3.64583 above the cost.
The only way you could lower this percentage, since the commissions will be the same
regardless how many shares you buy, is make a greater purchase so the commissions is a
lesser part of the whole.
This one would be close enough that I wouldn't get worked up about it. The rules is
there to prevent somebody from buy $500 of something in which they will have to pay a $58
round trip commission.
They would then have to increase their trade by some 11% just to break even.
Therefore if the stock needs to retrace a bit to get started and they have a personal risk
loss set of 7%, heck they are behind the eight-ball by 3% before they even start.
Remember, some trades will only hand you 2% or 3% and that is fine, but you have now where
to go if you have to make 11% before you can even come out ahead for goodness sake.
When you start trading larger hands, you will pay more for commissions than this $29
figure.
If you are trading the stocks that we are working with, you will be fine with that $29 for
quite a well, and when you do start having to pay more you will typically find that your
commission's percentage of the whole has not changed.
Simply remember:
(1) you need to find out how much your total commission will cost and
subtract that FROM the money that you are going to purchase the stock with.
(2) divide the price that you think you will pay for each share INTO the
money that you then have to purchase the stock with.
(3) after you find out how much PER SHARE you actually paid, you multiply
the number of shares by the price you paid and ADD in the total commissions
so you know what the ENTIRE amount cost for that number of shares.
(4) then you simply divide this ENTIRE amount by the total NUMBER of shares
to see at what price each share must be sold for you to BREAK EVEN. |