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Strategies & Market Trends : AIM Questions and Answers -- Ignore unavailable to you. Want to Upgrade?

To: OldAIMGuy who wrote (33)	4/10/1998 11:43:00 AM
From: OldAIMGuy	Read Replies (1) \| Respond to of 221

Q............... I was wondering how everyone sets their minimum $ amount to trade and/or shares to trade. Is it a percentage of total account value, personal preference, or is their some other method. TIA Evan ---------------------------------------------- A1................ Hi Evan, I think Tom can answer and correct me... See the Reply #'s 3802 and 3804 (AIM Users Group BB) as these explain for mutual funds and you could use a similar tac for individual stocks. The only addition I would add is that some funds require minimums to trade and others do not. This should be taken into consideration when setting minimums. I have to adjust some for my children's Price funds... I have used these suggestions since December 97 and they seem to be working quite well in my situation. (Building cash for the next opportunity... SOON?? says the Idiot Wave? ) SAM ------------------------------------------------------ A2.............. Hi Evan, I hope some other AIMers will respond to your question as well. In these days of deep discount commissions, the rules have changed a bit from a few years ago. I used to follow a strict 100 share rule for my minimums or $1000, but that was back when $50 commissions per trade was a "bargain!" I've always tried to keep the commission cost at less than 5% of the transaction's cost. With deep discounters, the share minimum and also the dollar minimum can be quite a bit smaller. (try to make them equal in value, however) Mr. Lichello suggested that we set the minimum for trading at the share and dollar equivalent of 5% of the equity side of our accounts. I find this to be just as good as any other measure. I do go as low as 2.5% on some of the larger mutual fund accounts that I tend. Most of the time, however, my stock accounts are in the 5% range or higher. The main "rule of thumb" to follow is that you want to make more money than Uncle Sam and also the Broker. Overall, this will make you very happy. It's like my Grandpa used to say, "The first person you should pay is yourself (meaning savings), and then pay everyone else." I feel my efforts at investing are worth more than either of my silent partners - the IRS or the broker. Therefore, I make sure that I get paid the most. I use the LIFO method when figuring this sort of thing. (I use FIFO for my actual tax calculations, but that's "tradition" for me) If I assume I make a 20% gain on a LIFO basis, then 4% goes to the government, a max of 5% to the broker, then the remaining 10% to 11% is all mine. Remember, silent partners should be considered as a "cost of doing business" and nothing more. Keep their share as low as possible. I hope this helps a bit. If anyone else has any thoughts on this, please chime in!! Best regards, Tom ------------------------------------------------------- A3............ Hi Evan, 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