What’s more important: Percent gain or loss, or dollar amount? If you ask me… 100%… percent!
First, let’s discuss why, no matter what your account value is, the percent gains or losses are the same.
If I have an account with $100,000 and you have an account with $1,000, what I make (or lose) will be much more than what you make (or lose), but the percent gain (or loss) will be the EXACT same.
So… Stock ABC (hypothetical company) is trading for $10 per share. We both want to buy shares because ABC is an awesome company and we think it’s going up from here. Our risk tolerance is 2% of our account value. That means my risk is $2,000 (2% of $100,000) and your risk is $20 (2% of $1,000).
For the sake of this example, I will leave any trade fees out of it.
With your $20, you purchase 2 shares ($10/share). With my $2,000, I purchase 200 shares. And wouldn’t you know it! The very next day ABC jumps up $2 per share. WOO HOO! Our analysis was correct, and we decide to exit the position with a profit.
You bought 2 shares, so you made $4 ($2 gain per share multiplied by number of shares). I bought 200 shares, so I made $400 on the trade. Fantastic! I made much more than you did… neeeener neeeener, pumpkin eater!! But guess what? Our percentage of profit was identical.
We each gained 20% on the trade, and .4% on total account value. Here are the numbers:
My account – $400 gain on a $2,000 position is 20%. $400 gain in a $100,000 account is .04%.
Your account – $4 gain on a $20 position is 20%. $4 gain in a $1,000 account is .04%.
Well well well! Would ya look at that. We both made a GREAT decision to buy. I’ll take a 20% gain for every trade I make EVERY DAY OF THE WEEK!!
What is my point with all this? That’s easy… ignore the bragger types and the ones who say stuff like “well, try doing that with a large account,” or “ya, but your account is so small.” Blah blah blah!! In investing/trading, what matters the most is that you make good investments/trades. The only way to know if your investment or trade was a good idea, is the end result. And the end result ends in a gain or loss, period! The fact someone is a millionaire, and I’m not, means nothing! Just because they’re a millionaire, does not mean they’re a good investor or trader.