Wednesday, August 12, 2009

Math rules

When is $0.90 greater than $1.70?


When $0.90 represents a 30% gain and $1.70 represents a 10% gain.

Let me explain:


Let’s say you have 2 stocks.  One is valued at $3, one is valued at $17.  You have $500 dollars to invest.

This translates to 166 shares of the one stock, and 29 shares of the other.  Both stocks do their thing, and the first notches a 30% gain for $0.90 and the second a 10% gain for $1.70.


The $500 in the first stock has “become” $650 while the $500 in the second stock has “become” $550.

$0.90 is greater than $1.70, which is why Citibank notching a $0.15 gain is bigger news than Wells Fargo notching a $0.30 gain.  (Still wish I would have pulled the trigger when I first looked at it rather than going on vacation and missing the first 200% bump in the stock, though.)


[Now, if you had unlimited funds but could only purchase 1000 shares of either stock—not a single share more or less, you purchase the second stock that went up a larger dollar amount, though with a lower return.  The 1000 shares result in a higher gain.]


Math is awesome.


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