Thursday, March 1, 2012

Getting Lucky on Stock Picks

I understand that you didn’t intend to sell the stock at the same price you bought it.  Your goal was to buy the stock at $425 and sell it at a zillion dollars.   Or two zillion, if you hold it a bit longer.  Sadly, the former example is much more likely.  But, even if you were successful, the stock would have had to rise to $443 just to break even, a 4.2% increase. 

Logically, the way to reduce your breakeven point is to invest even more.  Instead of one share, you buy the 10 at $4,250.   Then you only need a 0.42% increase in the stock to break even.   Mathematically, it makes perfect sense.  If it goes up to $443, you are making some money. 

If it goes down to $420, you are not only paying for the broker’s lunch, you are also doing a favor to the guy who sold it to you at $425.  The more shares you buy the more risk you are taking on. 

The downside of a drop in prices is obvious.  But what happens if you are successful?  You buy 10 shares of AAPL (the stock symbol for Apple Computer) at $425 and sell it at $443, making a nice profit of $164 ($180 less $16 in commissions.)  Then what do you do?  Go out and buy another stock, locking in another $16 (you’ll have to sell that one too) until you aren’t smart or lucky anymore. 

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