How Is A Purchase of a Stock Reflected in Your Profit or Loss?

First, you should understand some basic vocabulary for a purchase transaction:
  • Trade Date: The date the trade is made (usually on an exchange) and the economic ownership changes hands
  • Settlement Date: The date when the securities and cash actually move, typically a few days after trade date
  • Trade Price: The price paid for the security
  • Commission: An additional cost of the trade paid to the broker (person executing the trade on the client’s behalf), typically charged on a per share basis
  • Regulatory / Exchange Fees: An additional cost of the trade charged by the regulator or exchange, typically charged on a per trade basis
  • Net Amount: The dollar amount of cash being paid for the securities, with all fees and additional costs.  This is also the cost.
On trade date:
A negative “payable” of the net amount of the purchase is booked in the accounting system to reflect the liability (that the cash that will be going out on settlement date).
Your account is increased by the market value of holding the security
On settle date:
the negative payable is reversed
the cash is decreased by the payable (cash actually leaves the account)
We will dig into the above to understand it at a deeper level.

How Do you Calculate the Net Amount of a Purchase of an Equity Security?

  • You are buying 1,000 shares of a security
  • The trade price is executed at $11
  • Trade Date is March 4th, and Settlement Date is March 6th
  • Commission is $0.20/share
  • Regulatory fee is $1

Net Amount Calculation:

-$11,000 based on the trade price alone ($11 * 1,000)
-$20 for the commissions (.20 * 1,000)
-$1 for the regulatory fee (fee per trade)
—————————————————
-$11,021 is the total net amount

On the transaction, we express this as a negative number because you are paying for the securities.  The commissions and fees increase the amount of the purchase on an absolute basis, since it increases the cost of the investment.

 

How does get this reflected in the portfolio value and eventually performance?

Since the trade date is March 4th, that means you have the exposure to the stock from that point forward, even though the physical shares didn’t settle and the cash didn’t move until the 6th (as long as you dont sell within that time).

So from an accounting standpoint, you can and should reflect the ownership of those shares on March 4th. That is what we call “trade date accounting”.

To reflect the economic ownership of the 1,000 shares when you bought them on March 4th, systems will increase securities on the 4th and decrease “effective” or “trade date cash”, via a payable:

 

 

Lets say the closing price of the stock is $10 on March 3rd, $12 on March 4th, $14 on March 5th, and $16 on March 16th.  Here is what the values look like:

DateSettled CashPayableEffective or Trade Date CashSecuritiesMarket ValueDaily P&L
March 3rd15,00015,00015,000
March 4th15,000(11,021)3,97912,00015,979979
March 5th15,000(11,021)3,97914,00017,9792,000
March 6th3,9793,97916,00019,9792,000

Now lets say we say use t+1 accounting, how does that change the numbers?

DateSettled CashPayableEffective or Trade Date CashSecuritiesMarket ValueDaily P&L
March 3rd15,00015,00015,000
March 4th15,00015,00015,0000
March 5th15,000(11,021)3,97914,00017,9792,979
March 6th3,9793,97916,00019,9792,000

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