Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 12-19-2013, 06:20 PM
Junior Member
 
Join Date: Nov 2013
Posts: 14
Stock and Re-Investment

I know the below formulas to calculate Gains/Losses IF you have auto-reinvest in mutual funds.

Gain or Loss = Sale Price - Cost Basis
Cost Basis = {Original Cost Purchase + (Sum of all Capital Gains + Dividends)}

How about individual stocks? Do the above formulas still apply?

For example. I have a stock that pays $100 per quarter in dividends. If I use that $100 and buy more shares of the same stock, how does this affect my cost basis?

Thanks



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 12-19-2013, 08:04 PM
Moderator
 
Join Date: Oct 2010
Posts: 5,258
Quote:
Originally Posted by hoangtu69 View Post

How about individual stocks? Do the above formulas still apply?

For example. I have a stock that pays $100 per quarter in dividends. If I use that $100 and buy more shares of the same stock, how does this affect my cost basis?

Thanks

Correct. You need to determine the initial amount of money invested. For example, if you invested $5K for Stock XYZ, the cost basis is $5K. Cost basis can also be measured per share. If you bought 100 shares of Stock XYZ for $5K, then the cost basis per share is $50. So, remember that dividends are the portion of the profits a company pays out to you , as an investor (shareholder). Theoretically, the share price will drop by the amount of the dividend upon payment since that amount of cash has just been removed from the balance sheet. Dividends then are investment returns in the form of a cash payment. In contrast, when a company retains its earnings and foregoes paying dividends, the investment returns will presumably be in the form of an increasing share price (at least that's what its investors are counting on). Dividend reinvesting does affect the cost basis of your holdings, but it shouldn't be seen as a kind of partial refund of your original purchase. If you invest $10K in a dividend paying stock that generates $300 in dividends after one year (a 3% yield), just because you reinvest that income doesn't mean that your cost basis has been reduced to $9.7K. Reinvested dividends should be seen as a new purchase of stock. An example: you purchase 1K shares of XYZ for $25K. Your cost basis is $25/share. Let's suppose the stock pays a quarterly dividend of $0.31/share (equating to a quarterly payout of $310). Let's also assume that the stock rises by the time of the next dividend payout so that it's trading at $31/share when your dividends are reinvested. Your dividend payout is enough for you to acquire an 10 additional shares,$31*10=$310, purchased at $31/share. Reinvesting dividends is a powerful approach for compounding both total portfolio value and cash flow over the long term. Dividend reinvestment, combined with dividend growth and maintaining a portfolio of high quality companies, is a long term recipe for investment success.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 12-19-2013, 08:47 PM
Junior Member
 
Join Date: Nov 2013
Posts: 14
Thanks for a clear explanation



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Business expenses for an investment that never took off ppandya Itemized Deductions 1 09-18-2013 03:21 AM
Investment Strategy Curtis Investment Strategy 3 02-06-2013 05:55 AM
k-1 investment Income mip461 Limited Liability Company 2 04-04-2011 10:41 PM
Loan vs. Investment kevin_atg S-Corporation 1 10-23-2009 10:46 AM
Will Capital Losses on investment property be offset against Gains from Stock trades? Tanya Capital Gains 0 11-05-2007 11:24 AM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning
 
 
 

» Recent Tax Q&A
No Threads to Display.