Thursday, December 27, 2012

Tax Loss Selling Creates Small Cap Stock Buying Opportunites

When it comes to the end of the tax year, sometimes people decide to sell the stocks that went down in price from where they bought them in order to offset other stocks and investments where they had positive capital gains.

The object being of course to limit or eliminate as much of the capital gains tax by offsetting winning trades with losing trades and reducing or cancelling out any taxes due.

This is a sound strategy of course, especially if you don't plan on owning the losing stock in the near future. If you were to simply sell the stock to create the loss and then buy it right back, that would be called a wash sale.

The IRS has a rule called the "wash sale" that disallows the tax deduction of a stock market loss if the stock is repurchased within 30 days. An investor can sell and buy back a stock as quickly as he wants but must be aware of the wash sale rule. The short-term trading of a stock must balance the investment goals with the tax consequences.

One of the consequences of this type of selling is that it can have an amplification effect on a stock that has done poorly throughout the year. These particular stocks already did poorly price wise and then you have these large orders of people coming in to dump an already beat down stock at whatever price they can fetch.

This can create a particullarly attractive entry point for someone that is interested in getting in one of these stocks cheaply.

So take a look around at some of the common stocks you have always wanted to own but never thought the price was right. Your golden opportunity could be staring you in the face in the last couple days of the trading year.

Remember, do you own due dilligence before investing in anything. Make sure you buy a solid company with a good business plan and quality management.