Trading Accounts6 Jan 2023 10:29
If you dont normally buy the lows, and decide to trade to average down, so at prices below your main holdings book cost be weary of how your account adjusts and reduces your loss each time you sell a recent purchase at a profit, you may be losing sight of your true losses...
My account does this.....when buying same company share
So starting with £3 cash....
Purchase 1 share at £2....
Book cost £2, with an average price £2, & cash £1 in the pot
Total £3
Price drops to £1....
So you purchase another share at £1
Book cost £3, average cost £1.50, cash £0.
Total £3
For ease of explanation you change your mind on the recent purchase..
You Sell recent purchase at £1 .so no loss..
So back to the start, your original £2 share, and your £1 cash
Total £3
But not quite.........
Although you paid £1, and sold at £1 making no loss
Computers says average cost was £1.50, sale £1, loss 50p...
So with the share price at £1...
Account shows a valuation for your stock, as book cost £1.50, value £1, loss 50p, and cash in pot £1
Total £2.50p
But we started with £3 not £2.50,,,and the cash in your pot is the same at £1...
So a 50p loss has been dropped that needs to be recouped before break even...
The loss has been subtracted from the book cost, and lost from sight..
Its not wrong, but in my case I need to track that 50p on a spread sheet, to ensure I recoup it..