I have a position of 18k in a stock
yesterday it dropped from -20%
I bought 6k more at a lower price
Today it's up 20%
If I sold 6k of this stock would I earn profit since those stocks were bought below my old cost basis?
I'm confused about how this works. Which stocks are sold first? or do they all just pool together?
Do stocks bought at different prices consolidate or stay separate?
byu/Worried_Gur_3104 ininvesting
Posted by Worried_Gur_3104
7 Comments
You can decide which lot to sell. How to do that depends on your broker.
Each share has its own cost basis. So the amount of loss/gain depends on which shares are sold (unless selling everything). Which one depends on which cost basis method you are using (FIFO – first in first out, LIFO – last in first out). It is likely a setting somewhere in the brokerage site/app.
However most brokerage today allow selecting the exact shares you sell then you know exactly what you are selling, how much gain/loss, and thus how much taxes.
For example on Fidelity click on one of your holdings and click sell. In the order page that comes up change it from SELL to SELL SPECIFIC SHARES. A popup appears you can select the exact shares you want to sell. Note this is called specid and now that widely available there is really no reason to not use it on any selling trade (in taxable account). If you always use SELL SPECIFIC SHARES option you will always know exactly how much gains/taxes it will create before completing the order.
You can choose which lots to sell; if you do not choose, then your brokerage will use its default method, which is often first-in-first-out (FIFO), meaning the lots you bought first are the ones sold first. Capital gains and losses from stock transactions are netted against each other for transactions within a calendar year: first, short-term losses and gains are netted and long-term losses and gains are netted, then if there’s a gain on one and a loss on the other term, those are netted.
In my broker’s website you can expand the holding of the stocks to see each lot. You can even sell individual lots. Even if you sold them all together the profit or loss for each lot is separate because your taxes for each are different and might be short or long term.
Just curious if you don’t mind me asking, but if they’re all shares for the same company, why does it matter? The math remains unchanged regardless of which share of a given stock is sold.
Each share is its own entity, they stay separate.
Say shares were initially $100 each, $18k is 180 shares.
-20% makes each share $80 (now $14.4k value).
$6k now buys 75 additional shares, 255 shares worth $20.4k.
Now +20% makes each share worth $96, total value of $24.48k; your total position would be $480 above principal. (Tangent: it takes a +25% gain to recover from a -20% loss)
Whether selling 62.5 shares ($6k worth at $96 per share) is a loss or gain depends on which shares you sell; selling from first (180) lot would be a $250 loss, selling from second (75) lot would be a $1k gain.
While you make the trade you can chose to sell first in first out, last in last out, highest price or lowest price.