Question

Transaction costs  In late December you​ decide, for tax​ purposes, to sell a losing position that you hold in​ Twitter, which is listed on the​ NYSE, so that you can capture the loss and use it to offset some capital​ gains, thus reducing your taxes for the current year.​ However, since you still believe that Twitter is a good​ long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your 1,200 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades and for​ broker-assisted trades there is an additional $25 service​charge, so the total commission is ​$29.95.

a. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the​ bid/ask spread for Twitter at the time your trade was​ executed?

b. Given that Twitter is listed on the​ NYSE, do your total transaction costs for December seem​ reasonable? Explain why or why not.

c. When your February statement arrives in the​ mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the​ bid/ask spread for Twitter at the time your trade was​ executed?

d. What are your total​ round-trip transaction costs for both selling and buying the​ shares, and what could you have done differently to reduce the total​ costs?

Answer 1

a.

If the total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the​ bid/ask spread for Twitter at the time your trade was​ executed?

Bid/ask spread (difference between the shares bought price and sale price)

= 59.95-29.95 = 30$

Now the 30$ is spread over 1,200 shares the 30/1200 = 0.025$

b.The transaction costs associated with the stock are far more greater than the transaction amount along with spread so, basing on that it is quite not reasonable for the transaction costs in december.

c.Transaction cost = 47.95-29.95 = 18$ which is spread over 1200 shares so,

= 18 / 1200 shares

= 0.015$

D. Round up transaction cost: Total round trip transaction costs / no of shares

= 59.95 + 47.95 = 107.90 spread over 1200 shares, so

= 107.90 / 1200

= 0.09$

By reducing the extra costs like commision and other costs by discussion with the commision agents we can reduce the costs to some extent.

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