I see that Tom has a great answer... as always. I'll offer a slight variation that I use because I got very frustrated trying to use current account value to establish the 5%-value for a minimum trade. The problem is, and this is true if you use Newport, Excel or scratch paper, the "5%" number is constantly moving as price moves. For example if you've been buying XYZ and have accumulated 10,000 sh at the current price of 2.125/sh, the current value is $21,250; 5% of this is $1,062.50. If the price of XYZ goes up 1/4 pt., the new value is $23,750 and 5% of that is $1,187.50 which is a change of almost 12% in the minimum-trade amount. To be consistent with the 5% rule, I found I had to keep changing limit orders because the value for minimum-trade kept changing. This, of course, defeats the purpose of a limit order. So as an alternative, I started using portfolio control as the reference value for computing the 5% dollar minimum. Now the only time the minimum-trade value changes is when a limit order to buy gets tripped or when I apply a Vealie.
None of this is meant to contradict what Tom has said about paying yourself first or minimizing commissions as a % of total transaction value. That is a universal truth and we must follow that advice or we're going to regret the deviation. The flaw in what I'm doing is that 5% of PC may be a long way from 5% of stock value, so you may find you have to adjust to something besides 5% to provide a number that's appropriate and meets the conditions that Tom laid out to pay yourself first.
Btw, I'll bet your question ends up on the FAQ thread anyway! :-)
Bruce |
