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Long Shares

Analyzing the risk of long shares

Multiple Entry Prices

There may be times when you buy shares at multiple different prices and in various quantities. When this is the case, the average share price is the break-even. This is calculated by dividing the total debit paid by the number of shares:
Total Debit = ($X × # Xshares) + ($Y × # Yshares) + ($Z × # Zshares)
Total Shares = # Xshares + # Yshares + # Zshares
Break Even = Total Debit ÷ Total Shares
Equations are nice, but let's visualize what this looks like on a risk graph...

Leg 1 – Buy 30 Shares at $X:

Figure 1

Leg 2 – Buy 20 More Shares at $Y:

Figure 2

Leg 3 – Buy 50 More Shares at $Z:

Figure 3

Cost Basis Reduction

In the images above, notice how buying more shares at lower values lowered the break-even to the average price per share. This effect is known as "dollar cost averaging" – a term used a lot in traditional financial management. While buying more shares at a lower price may lower your average
your total
(total debit) has actually increased, along with your risk. You can see how the risk has increased by the steepening slope of the black line.
Improving total cost basis is paramount for success as a trader. This is where options will come in handy. They can allow you to reduce your total risk and simultaneously improve your probability of profit! In the coming articles, I will show you how this is possible.

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