Mike's Market Strategy Calculator

I don't have much advice for investing in the stock market. However, I do believe that you should set realistic goals and stick to them, even if it means dumping stock early.

One interesting way of investing in the stock market is this: You buy some shares at a certain price, and then if the price goes up to a point where you can recoup your investment by selling a subset of your stock you sell that subset. This is equivalent to putting your cash in a sock under your bed for a while and when you pull it out you get your original cash back plus some "free" shares of a company.

The problem with this (aside from losing your money if the stock tanks) is that you have to pay commissions for buying and selling, plus you will have to pay capital gains tax on the subset of stock that you sell, since you technically made money on those shares. This makes finding the ideal selling price difficult.

With the handy calculator below, you can easily find out what your selling point should be.

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Let q1 = Purchase Quantity, q2 = Sale Quantity
    p1 = Purchase Price, p2 = Sale Price
    c  = Commission
    t  = Tax rate (applied to 50% of capital gains)

Initial investment:     i = p1q1 + c
Net proceeds from sale: n = p2q2 - c - (p2-p1)q2t/2

We want to solve for p2, with the constraint that n = i.

Setting n = i gives p2q2 - c - (p2-p1)q2t/2 = p1q1 + c
               p2q2 - c - p2q2t/2 + p1q2t/2 = p1q1 + c
                             p2q2 - p2q2t/2 = p1q1 - p1q2t/2 + c + c
                              p2q2(1 - t/2) = p1(q1 - q2t/2) + 2c
                                         p2 = (p1(q1 - q2t/2) + 2c) / (q2(1 - t/2))

Comments

Don't studies indicate that you can't beat the market ?  I think this strategy
might be doomed to failed if one views this in a long term basis.

You are correct, of course.  If you want to make money, I suggest staying away
from the stock market unless you really know what you are doing.  However, if
you want to have a gamble a little bit this is one way of doing it.

Personally, I enjoy picking a stock that looks like it has potential and buying
into it.  This is my way of hedging -- as soon as I can, I pull out my original
investment.  After that point, I can't lose.  It makes things seem less risky,
although it is mostly a psychological effect.

Geez, I made at typo...I'm getting old.  Right, that works as long as you
believe that you CAN (shall have the chance in the future to)  do that.  There
is a cost of course to tying up money in any investment (time value of money
ie. put money in a bank and it's guaranteed more or less to grow albeit slowly)
 The one thing that I don't see your strategy including is some mention of
risk(volatility).  Of course you CAN beat the market if you are willing to
accept more risk.  

Well, apparently my arithmetic skills are a little rusty.  I flipped a sign
somewhere, making the end equation incorrect.  I have fixed the problem now...
but if anyone happened to use this calculator to work anything out, they should
run the numbers again just to be safe.

Unfortunately, my mistake caused me to miss a good opportunity to sell Google
last week.  :(

How come this doesn't work for me?  The economy sucks down here, this is the
time I need this calculator the most!!!  :)