Basis Risk
Let's say an investor engages in a hedging strategy (investing in different securities with negative correlations to offset, or "hedge" the risk of price or value fluctuations in one of the securities you've invested in). Their basis risk is the possibility that security "b" (bought to hedge the decrease in value of security "a") will not experience an increase in value if security "a" depreciates.
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Finance: What is Cost Basis?10 Views
Finance allah shmoop what is cost basis or set another
way What is the basis for tax purposes of your
cost in this stock or this investment Like you bought
a stock a twelve bucks chair and now it's a
thirty and you go to sell it So really why
does all this matter One word yet our beals above
word rhymes with smacks is so when a company or
an individual cells something while there are three outcomes the
asset either made money lost money or broke even if
it broke even there's Nothing to do no tax to
pay no paper to be filed ever been pointing out
the cost bases was in fact the net sales price
for the whatever but for gains Well where there are
a lot of taxes to pay the cost basis matters
a lot Think about a share of coca cola your
grandpappy bought in nineteen eighty for about a dollar a
share It's trading at fifty one dollars a share now
so happy jed has a fifty dollars a share gain
that he would realize meaning get taxed on if he
sold that coke stock and turned it into cash will
His cost basis was a dollar a share and his
gain is taxable Gain was fifty bucks a share and
at a long term tax rate of about forty percent
in a blue state that would be twenty dollars in
tax on that fifty dollars of gain and ouch Yeah
After that sale for fifty one dollars a share of
coke he'd be left with only thirty one bucks in
his pocket Enormous tax Painful so painful in fact that
his gain is so much with his cost basis so
low Well that pappy jet is highly incentivized to never
sell that share of coke at least not unless he
absolutely has to In the math here is painful At
fifty one bucks a share coke will earn three bucks
a share this year and three fifty next So if
he nets thirty one dollars a share in his pocket
after the sale well then he's essentially selling coke polo
one of the premier companies in the world at thirty
one over three fifty or just about nine times forward
earnings which is just a crazy low cheap price for
one of america's premier growth companies right And yes it
works the other way around too And no not like
that Had he bought shares of yahoo right its peak
at two hundred bucks a share and then held it
a decade so that it was down teo little forty
dollars a share Amongst that being ali baba he could
realize attacks lost of one hundred sixty dollars a share
by selling it And that loss and a forty percent
tax rate marginal tax rate kind of tax rate world
is actually worth a lot in offsetting tax gains or
tax savings of point four times one sixty or sixty
four dollars a share in tax savings Like you khun
shelter gains by realizing losses Welcome to america So yeah
there's a perverse relationship with pressure toehold versus pressure to
sell when stocks do really well it's painful to sell
them because taxes take such a huge bite out of
your net gains and the opposite is true as well
When you lose money on a stock well you're highly
incentivized to sell that loser shelter gains on your winners
and we'll just move the hell on Want to see
something really freaky Right Go into the bathroom Turn off
The lights and say the word tax me uncle sam
Three times Just a word of warning though We want
to keep a firm grip on your wallet If you 00:03:28.835 --> [endTime] do that there
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