Chapter 2, Problem 2.2P

Transaction 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 your 1,200 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 $25.00 service charge, so the total commission is $29.95.

1. 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?
2. b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not.
3. 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?
4. 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?