LogFAQs > #941946968

Moonroof posted...

But if it goes up 1% on Monday, isnt that 1% bigger when using my lesser starting value than the higher value it closed at today?

Yes, but you now have more money invested because your gains are already invested in the stock as well. Here's an example with simple numbers.

I use $100 to buy 10 shares of stock A on day 1. On day 2, stock A rises 100%. On day 3, stock A rises another 10%. Supposing I stay invested in stock A:

My balance after day 2: $200 (10 shares of A)
My balance after day 3: $220 (10 shares of A)

Supposing I sell half my shares on day 2:

Balance after day 2: $200 (5 shares of A + $100 cash)
Balance after day 3: $210 (5 shares of A + $100 cash)

Now either way, I'm going to see that stock A rose 10% on day 3......but if I take out half my position and put it in cash, then my portfolio only gains 5%, because I was 50% invested in an asset that produced a gain of 0% - cash.

Of course, if I used to $100 I got from selling the 5 shares to buy something else, and that thing went up 10% on day 3, I'd end up with the same amount as before - $220. That means that actually closing the position doesn't make any difference, except for taxes.

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September 1, 2003; November 4, 2007; September 2, 2013
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