General Stock Investment Strategies/Cost From Purchase
How does a investor in stocks or exchange traded funds know when to sell a stock or ETF that he has bought more shares in so that he can make a profit?
For example, if an investor bought 100 shares of XYZ stock and later 50 shares of XYZ stock and 75 shares of XYZ stock, how does he determine what price to sell since his costs (commission) have increased because of the purchase of additional shares?
I thank you for your reply!
Kenneth, I'll ignore tax issues in this answer because it doesn't sound like you're asking about that. The simple answer is that you add up your total cost for all of the batches of shares, including commissions, and divide it by the total number of shares you own, and that's your break-even price. Anything above that and you've made a profit...well, after you factor in whatever commission you'd pay when you sell, which should be small.
But that doesn't necessarily tell you when you should sell an investment, and it can hurt your results to wait until you "break even" with every investment you buy. Imagine you bought shares of a company in a few batches, all at high prices. The company doesn't do nearly as well as you'd expected, and the stock price tanks, and a new competitor comes out that makes the company's products much less appealing than they had been in the past.
The fact that you paid a lot for the shares doesn't mean you should wait to sell. Doing so is a common investor behavior, called "anchoring" - where you put too much emphasis on your purchase price, and are reluctant to sell until you "get even" with the investment. While it's difficult to do, it's a good exercise in investing to ignore the price you paid and just focus on what the investment is worth today. It's a given that some investment picks will be bad ones, so sometimes it's better to sell instead of waiting for a break-even price that never comes.