Page 143 - CalcBus_Flipbook

CH 18] Calculating Business 18-7

equipment (radios, TV/screens and monitors, and sound equipment); (6) technology and
communications companies that deal with infrastructure, communications, and equipment
development; (7) energy companies, such as utilities, fuel production, the new sciences for
alternative energy. There are others, as an investment portfolio is developed, spread
investments over several company’s helping to assure and safeguard investment value while
providing growth in value (wealth) and a return (profit) to the investor; and do not overlook
the aspect of time and patience.

Associated Costs of purchasing. Stocks in public corporations are sold daily by
individuals in lot sizes of the sellers choosing, and for every stock sold there is a buyer.
Generally buyers and sellers do not know each other and it is the stockbroker who helps Stockbroker: A
these two come together as an agent facilitating the transfer of ownership in a single broker who buys
transaction. For their services, these agents charge a commission fee. Stockbrokers will and sells securities
perform several transactions daily and earn commissions on each transaction. The on a stock
exchange on behalf
commission charged is typically 2% of the stock value with a minimum commission of $50. of clients.
Trading commissions for odd lots are generally higher on a percentage basis than those for
standard lots, since most brokerage firms have a fixed minimum commission level for
undertaking such transactions.

A single transaction is an order for a specific stock; the price per share is determined,
the order is executed, confirmed, and settled for an investor in one day. The cost for the
transaction is determined by the number of shares in the transaction multiplied by the cost
per share, which is the trade value of the transaction, and the commission for the
transaction is added to the investment cost which tally’s the total cost to the investor.

Trade Value + Commission = Total Cost to investor
Example: An investor bought 400 shares of stock at 32.08 per share plus $256.64
commission. Determine the total cost of this transaction.
Solution algorithm:
Price/share x no. of Shares = trade value
$32.08 x 400 = $12,832.00 trade value of 400 shares
Trade Value + Commission = Total Transaction Cost
$12,832.00 + $256.64 = $13,088.64 total transaction cost
Total Cost of Odd lot Orders. The standard trading lot for securities is 100 shares.
Odd lots are considered to be anything less than the standard 100 shares for stocks.
Purchasing 85 shares is an odd lot order. Odd lot trades are performed by an odd lot dealer
who performs the “wholesaling” function of dividing round lots of securities into smaller Point: A stock point is 1%
quantities. Trading commissions for odd lots are generally higher on a percentage basis than which can be $1. One-
are standard lots. Brokerage firms have a fixed minimum commission level for undertaking eighth of a point is (1/8 =)
such transactions. The “wholesale” function fee of odd lot splitting is about one-eighth of a 0.125 or $0.125.
point, or $0.125, higher for each share bought or sold. This cost increase is the odd lot
differential.
Follow this algorithm to calculate the total cost of an odd lot purchase of stock, follow Discount broker: A
these steps: stockbroker or
1. Determine the odd lot price per share by adding the odd lot differential to the round brokerage firm that
lot price. charges a reduced
commission on
Price/share + odd lot differential = odd lot price per share transactions but
2. Determine the trade value of the stock by multiplying the odd lot price per share by typically does not
the number of shares in the transaction. provide investment
advice or other services.
Odd lot price per share x no. of shares = trade value of transaction
3. Calculate the total cost by adding the commission to the trade value of the order.
Trade value of transactions + commission = total cost of order

Example: An investor bought 85 shares of JP Morgan Chase stock at the round lot price of
$109.45 per share and paid the discount broker $139.55 in commission. Calculate the
total cost of this order. 18

Copyrighted Material