In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your1,200 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades and for broker- assisted trades there is an additional $25 service charge, so the total commission is $29.95. a. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed? b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not. c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed? d. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?
In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your1,200 shares of Twitter and then in early February buy them back. Charles Schwab charges a commission of $4.95 for online stock trades and for broker- assisted trades there is an additional $25 service charge, so the total commission is $29.95. a. Suppose that your total transaction costs for selling the 1,200 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed? b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not. c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,200 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed? d. What are your total round-trip transaction costs for both selling and buying the shares, and what could you have done differently to reduce the total costs?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:In late December you decide, for tax
purposes, to sell a losing position that you
hold in Twitter, which is listed on the NYSE, so
that you can capture the loss and use it to
offset some capital gains, thus reducing your
taxes for the current year. However, since you
still believe that Twitter is a good long-term
investment, you wish to buy back your
position in February the following year. To get
this done you call your Charles Schwab
brokerage account manager and request that
he immediately sell your1,200 shares of
Twitter and then in early February buy them
back. Charles Schwab charges a commission
of $4.95 for online stock trades and for broker-
assisted trades there is an additional $25
service charge, so the total commission is
$29.95.
a. Suppose that your total transaction costs for
selling the 1,200 shares of Twitter in
December were $59.95.
What was the bid/ask spread for Twitter at the
time your trade was executed?
b. Given that Twitter is listed on the NYSE, do
your total transaction costs for December
seem reasonable? Explain why or why not.
c. When your February statement arrives in
the mail, you see that your total transaction
costs for buying the 1,200 shares of Twitter
were $47.95. What was the bid/ask spread for
Twitter at the time your trade was executed?
d. What are your total round-trip transaction
costs for both selling and buying the shares,
and what could you have done differently to
reduce the total costs?
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