Question

“If a stock goes up, you should sell it to lock in the gain and buy another stock, but if it goes down you should hold it to recoup the loss”.

Evaluate this statement a) with no taxes, and b) with taxes.

Answer 1

Evaluating the statement with 1) With no taxes and 2) With taxes

Statement projects to come out of gains when in uptrend, and hold onto the stock until it recoups the loss while the stock goes down. Now , for an example, we've bought 1000 shares worth share value of 20$, that is we hold the value of 20,000$ in the company. Suppose, the stock has rised from 20$ to 27$, this effects the 7$ increase and total amount we'd hold is around 27000$ where we may sell for 7000$ profit. And bonus point is , there are no taxes involved where only brokerage might apply here. If taxes are levied, like say 30%, 30% on 7000$ would be 2100$, taking this 2100$ from 7000$ would result 4800$ as a profit. So 2100$ would be saved if there were no taxes applicable. In case , our stock has downtrended from 20$ to 15$, we'd lose the value of 20,000$ to 15,000$, making the loss of 5000$, here you'd have to wait until the market reaches at the market rate of 20$ or more.