Can someone break this down for me because I know I’m missing something. When I was with TD ameritrade they calculated your position using cost basis / FIFO. If I bought into a position in multiple tranches averaging down and then as the stock went up higher than my first purchase I would start trimming. As I trimmed on the way up my share count in the position would go down and so would my cost basis as I sold off the FIFO tranches for gains. With each trim I would have less shares with a lower cost basis.
Now, I am with HOOD. They do not use cost basis but rather average cost. So in the same scenario as above if I were to buy multiple tranches of a position while averaging down then the stock jumps above my first buy and moves up as I start to take profits my average cost stays the same. So I trim the position holding a lower amount of shares at the same average cost.
How do these 2 methods equal out? I know they must I just can’t figure it out. It seems to me TD was way more beneficial as I would lower my cost basis as I took profits which resulted in me holding shares at a lower price to reflect the averages of my purchases of stock at lower prices, but with hood I’m losing the shares and staying at the same average position even though I bought many tranches at lower prices while averaging down.
Example:
TD / cost basis.
If I bought 100 shares at 10 and 100 shares at 8 my, cost basis would be 200 shares at 9. If the stock moved up to 15 and I sold off 100 shares I would get the cap gains and my new cost basis would be 8.00. I’d hold a 100 shares at 8. Since FIFO that first buy of 100 at 10 would go away.
HOOD / average cost.
Same exact scenario but I would still hold 100 shares at the 9.00. The average cost doesn’t change.
How in the world does that make sense, what am
I missing?
Leave a Reply