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<<So, when I sell my 100.320879 shares of XYZ, Inc., it doesn't matter how much was spent per share but how many shares for Mr. IRS and his friends? I wanted to make sure the per share price and the amount I sent in matched. Now I have to figure out why this is a bad thing........>>


Almost there. For our friend, IRS, he is concerned about how many shares are sold/bought and how much those same shares cost (cost basis). To get to the cost basis, well this is how much you paid (mailed to the company) for the share even if it was only 0.001 shares.

Example: I send in $10 to KO. When the transfer agent finally gets around to making the purchase, I bought 0.050 shares. What is my cost basis? Well, let's see...oh yeah, I sent in $10 so my cost basis is $10. Does the IRS care what the price per share was for this purchase? No, because they are interested in the cost basis which is $10 as compared to the price I sell the stock at some day.

So what was our share price for the exercise? $10/0.050 = $200 per share. What does this mean? All it tells me is that to buy one full share it would cost $200 but since I only had $10 I could only purchase 0.050 shares.

Let's go another step further:
Months go by and the share price increases to $250 per share so I decide that I must sell. Do I receive the $250 since that is the share price? No, remember that I only own 0.050 shares so I will receive $12.50 (we are ignoring commissions). It is now tax day and I have to report the sale on my Schedule D form so what happens now? Well, I enter the number of shares sold (0.050) and my cost basis ($10) and the gain ($12.50-$10=$2.50). So I am taxed on a gain of $2.50 and not the increase of the price per share. Of course we are really incorporating the increase in share price into our calculation, but it is only relative to the number of shares we have at the time of sale and the share price at that time. Our cost basis will always be the $10 because that is what we sent to the company and we could only buy 0.050 shares because the share price was $200 per share.

Do we care what the share price is when we buy a stock? Yes, because we want to know that we are buying something of value but it is not as important as the number of shares we bought or the actual amount of money we paid.

I hope that this long analogy makes some sense, if not then I apologize for causing eye strain in reading.

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