The Transparent RRSP: Share Prices & Flash Crashes

Action taken the week of June 5
  • Bought 20 shares of TransAlta (TA.TO) for 7.74. This cost me $154.80 + 0.20 cents of commission. I now have 45 shares of TA. There is $16.90 in cash left in the RRSP account.

If you buy a stock at different times and at different prices, then it makes sense to figure out the average cost of the shares. The previous 25 shares of TA were purchased at $7.63 per share. I’ve worked it out below:

  • 25 shares * $7.63 = $190.75 + $0.25 commission = $191
  • 20 shares * $7.74 = $154.80 + $0.20 commission = $155
  • $191 + $155 = $346
  • $346 / 45 total shares = $7.69

This is also known as the adjusted cost base, or ACB. I use the share price of $7.69 to determine how much I make in profits (or losses) when I sell the shares at a different price later on.

If I want to determine just the average price of the shares, I can do the same thing, only I leave out the commission fees. It works out to be $7.68. It doesn’t seem like much of a difference, but that’s only because my commissions are extremely low.


Flash Crashes

Yesterday the Canadian market closed positive. We traded sideways all week. Not much action, which I prefer. The US market, mainly the NASDAQ, however, experienced a flash crash. I saw the charts and so I had to see what the news had to say about it. They explained that the mega-cap tech stocks (Facebook, Apple, Amazon, Netflix, Google – aka FAANG) were starting to sell off. They weren’t the only ones selling off hard before the crash. The semiconductor stocks (SMH is a semi-conductor ETF in case you’re interested in viewing its chart) were selling off heavily after noon. It had been a long while since the tech sector had shown any major weakness.

After hitting new highs this week, investors were starting to collect profits and play defence by unloading some shares to be less exposed to a sell-off. Well, if enough investors with large holdings (particularly institutional investors) get the same idea, this triggers a mass sell-off. These sales which began around noon triggered the automated trading programs to sell later on in the day, which led to an overall big sell-off in the market. This domino effect happens when giant stocks fall; sometimes even one giant stock can affect the general market. The NASDAQ market lost its last three weeks of gains in minutes. It recovered partially at the end.

I have shares in a few of these tech stocks and I was thinking this week, “Wow, I can’t believe it just keeps going up! When will it come to an end?” I had sold some shares to collect profits a few weeks ago; I was left with the disappointing feeling that I had acted a little too soon. However, I did so because I was anticipating this. (If you’ve been reading my blogs, then you know this isn’t hindsight commentary.) I’ve lived through enough flash crashes to know that I’d rather make my decisions away from such events, not in reaction to them. I still have some shares left in these stocks, but I’ll see how they do over the next couple of weeks.

The Canadian market came down a bit in reaction, but it came back and closed positively. These flashes tend to be more pronounced in the US markets. Because the US market is so big, a crash can affect the global markets if sustained recovery doesn’t follow.

It’s events like this that could deter people from wanting to ever invest in the market in the first place. These things can happen in any market, though, because people are prone to panic. Rather than cave into your feelings and react out of fear of the worst to come, it’s best to try to be objective: Observe the sentiment of other investors and see how your holdings are doing on the bigger time frames like the monthly charts. There is a good chance that your charts are still looking healthy. A correction here and there is to be expected as nothing ever goes straight up. All I can say to all that is to keep calm and let your stock carry on!

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