Saturday, December 26, 2009

Strategy Cost ?

"Cost" is the money you paid in order to get something you want in return.
"Strategy" can be simplified as the methods you use in achieving a goal.

Strategy cost is the money you MAY have to pay if you use certain methods but NOT necessary ... depends on how it turns out. For example,

When buying shares in stock market, you will have to pay some broker fees, stamp duty and clearing fee etc. Those are the real cost incurred. The way to calculate cost is usually fix, pre-arranged and agreed up front. Putting these fees aside, right after you bought a share at $1.00 the immediate buy back price is usually lower i.e. $0.99. The difference between this buy and sell price can be seen as strategy cost.

You don't really pay this 1 cent. If the price goes up and you earn money, you earn 1 cent less. If the price goes down and you lose money, you lose 1 cent more. So strategically you are 1 cent disadvantage to the market.

Some may say this is future costing. You actually pay this 1 cent but only deducted from your withdrawal at a later date. Although there is nothing wrong to think of it this way especially account wise, but it could be more beneficial to use strategy cost to access which strategy is better in your investment.

Strategy cost shares parallel direction as your investment movement. When you buy a share, you want its price to go up so that you can earn money. The 1 cent difference affects your ability to do that.

Strategy cost may not be fix and is usually depends on situation. If the demand for the share you bought is low, the buy back price could be $0.98 or even $0.95. So buying a low demand share is strategically more disadvantaged to buying a high volume stock. In this case its a comparisons among 1, 2 and 5 cents. No long just a general concept but a measurable comparison.

Since you don't really PAY strategy cost, it is rather vague to talk about it. But strategy cost becomes more useful when you are comparing different investment methods or different situation.

The very recent comparison is between buying something with CASH vs getting a LOAN.