Thank you for visiting my blog to discover what I endeavour to share with the world. Your time and attention is appreciated.
This blog is going to address a question that was posed by my favourite people on twitter, the #fintwitter peeps.
The question related to what happens when an investor decides to take the profits gained from the appreciation of the share price for the stock that they are holding.
So, strategies are important when you embark on investing. Refer to my blog What of these strategies they go on and on about?
If your strategy allows for investing in shares where you are looking to maximise your gains in the short to mid term, then you would be looking to buy shares that you are looking to lock the profits you make from them, in. This strategy borders on trading as it can be fast paced.
Here's a scenario of Yesterday, Today and Tomorrow...
If yesterday X bought shares for R80 and got 8 shares, it means that each share was R10 and contributed 12.5% to the whole of R80.
If today Y, buying the same shares for R80, gets 5.33 shares, it is because the share price has increased and each share now costs R15 and contributes 18.75% to the whole of R80.
X, who bought yesterday, has made a 50% gain on each share, so now X's share is worth R15 and contributes 18.75% to the new whole of R120.
So 5.33 * 15 gives X R80, which is the same as what Y has, the difference between X and Y is that X has pocketed R40 and is back to having the same whole as Y of R80 and no longer has 8 shares but has 5.33 shares.
If tomorrow Z buys the same shares for R80 and gets 10 shares, it means that each share price has decreased to the cost of R8 for each share, contributing 10% to the whole of R80.
Y has lost R37.36, which is 46.7% of R80. Now the shares are each contributing 18.76% to the new whole of R42.64 , which is essentially the same due to the adjustment in value. Share value adjusts based on the number of shares held when the share price changes.
X has also lost R37.36 as a result of the new share price, but X's profit of R40 has cushioned their loss such that they still have a profit of R2.64, that is money either in their pocket or invested elsewhere.
*You can even go so far as to say that X's investment is R40.00 and that would then mean that their 5.33 shares contribute about 20% to the whole that is R40.
With the new price, X's number of shares still being 5.33 does not give them 100% of R80 at a portion of 10% when compared to the number of shares Z has. So X has lost (100 - (5.33*10)) = 46.7%.
In theory, the money in X's pocket is still R40 rand, but taking into account the loss on the share that gave X that gain, X is tomorrow sitting on only R2.64 gains in real terms. So X has less stake in the shares than Y and Z, but when dividends are being paid, Z will get more than X and Y, but X's dividend yield will be more than Z's, in the way that X's adjusted average that accounts for his adjusted invested amount, actually means that each share cost X (40/5.33) = R7.50
Z's shareholding is now more than X and Y's, as he holds more shares for the new value of R42.64, so he got more shares for his additional R37.36 for buying when the price is lower. A whole 4.67 shares more!
The investor who is worst of as a result of tomorrow's move is Y.
I hope the above has clarified some of the questions you have about what happens when you do certain transactions on the stock market.
Thank you for reading!
My profile and bio, on twitter handle @guepard_1, has a poster with images of my fictional side. The stories I tell, will have your jaw dropping, hie hie hie...
No comments:
Post a Comment