Break-Even Point - BEP

Break-even ~ BEP

The point in which we do not lose any of our original invested capital. The point where gains equal losses. A Break-even stop is a stop loss order placed at the point where we do not lose any of our original invested capital in a tradable security. A break-even price is the price an asset must be sold at to cover the cost of acquisition and owning it. At this price the Investor would not see any profit, but also would not suffer any loss.

Capital is placed at risk for an expected return above the risk-free rate. “Breaking-even” means that your opportunity costs have been paid, and your capital has received the risk-adjusted, expected return. It is the purchase price plus time. [1]

Assuming that on July 27, 2012, the record date, a share owner purchased 100 shares of common stock of The Coca-Cola Company (KO) at a market price of $75 per share. After the market goes up and reacts, the share owner places an original cost stop at $75.00 per share.

On August 10, 2012, the distribution date, shareholders of record received a 2-for1 stock split. After the split, the shareowner owned 200 shares at an initial market price of $37.50 per share (assuming a $75 stock price on August 10, 2012). The share owner’s total investment value would remain the same until the stock price moves up or down, but the original cost stop would need to be lowered to $37.50 per share. [2]

Opportunity cost encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash, and simply spending the funds. Currently the 10 year treasury rate is 2.00% annually or 1/2% per quarter. [3] If we consider the 10 year treasury rate as a reasonable opportunity cost instead of Coca-Cola , then we can add 1/2% per quarter to compensate for our cost of capital. Going into 2013 the break-even point (Breakeven stop), on the 200 shares, moves up to $37.69 ($37.50 plus one quarters interest of 1/2 percent), and will continue to move up each quarter.

break-even also break-even; usually with point, 1938, from break + even, The verbal phrase in the financial sense is recorded from 1914. [4]

Sumflow 07:41, January 29, 2013 (PST)

References

  1. Template:Cite book page 13 [1]
  2. [2]
  3. [3]
  4. [4]

Sumflow 04:28, January 28, 2013 (PST)

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