Saturday, September 12, 2015

Analysis of Stock Price Moving Up and Moving Down

It is generally believed that it is tough to recover from the loss on a stock since if the stock price moves down by a certain percentage it needs to go up by a higher percentage to get even.

Though the above is factually true it is not a very relevant factor when one is investing in stock markets. The above is the mathematical effect of base whereby percentage increase for the same quantum would be lower for higher base and vice versa.

Suppose you have 100 dollars. An increase of 10% would mean the price would move up to 110. Now to go back to 100, 110 has to move down by the same quantum. In case this effect is represented as percentage the numbers would be different. While moving up the percentage would be (110-100)/100, which is 10%. And while moving down the percentage would be (100-110)/110, which is -9.1%. The net effect on the profit/loss from the stock doesn't change due to this mathematical effect.

Following table and chart shows this relation quite clearly. It is just a mathematical result and should not be of much concern to anyone involved in stock market investing.

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