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I have no prior experience with stocks so please forgive me if this is a dumb question but I don't even know what to try googling. Two days ago I signed up with scottrade. I put $1000 into ICENX mutual fund. It got me ~56 shares. Today I log in and I see this:

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What has happened? Apparently the share price took a huge plunge but my shares magically multiplied? Why does it say I lost $258 if I actually gained $12? Thank you guys so much!

  • Good question - there's something pretty bizarre going on there. It's almost impossible for a mutual fund to lose 20% in a single day unless there's something catastrophic going on with the stock market as a whole. My first guess would be that there's simply something wrong with the data and that it might get corrected by tomorrow. – Michael Borgwardt Dec 19 '14 at 14:36
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    @MichaelBorgwardt The fund made a distribution (went ex-dividend as the financial folks called it) and since the OP must have chosen to reinvest his distributions, the number of shares owned went up as the share price went down. The $12 difference is due to market fluctuations in the price of the actual stocks that the mutual fund holds. – Dilip Sarwate Dec 19 '14 at 14:52
  • @DilipSarwate: I thought about that as well, but dismissed it due to the large change and lack of previous similar events in the chart, but now I've seen data that corroorates it (on Morningstar) - looks like for some reason they had an extremely large distribution. – Michael Borgwardt Dec 19 '14 at 14:56
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    You've gotten good explanations for the number of shares and the resulting values. I just want to add that the reported changes that you show above are based only on the share value; as has been explained, that value took a hit, and the result is an apparent large loss because the report doesn't take into account the increased number of shares that you own. Ignore it. Just look at the actual values involved. You invested $1,000, and your investment is now worth $1012.1526. The rest is nonsense. – Pete Becker Dec 19 '14 at 19:35
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    Was this in a retirement account? – JTP - Apologise to Monica Dec 21 '14 at 16:54
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You did something that you shouldn't have done; you bought a dividend. Most mutual fund companies have educational materials on their sites that recommend against making new investments in mutual funds in the last two months of the year because most mutual funds distribute their earnings (dividends, capital gains etc) to their shareholders in December, and the share price of the funds goes down in the amount of the per share distribution. These distributions can be taken in cash or can be re-invested in the fund; you most likely chose the latter option (it is often the default choice if you ignored all this because you are a newbie). For those who choose to reinvest, the number of shares in the mutual fund increases, but since the price of the shares has decreased, the net amount remains the same. You own more shares at a lower price than the day before when the price was higher but the total value of your account is the same (ignoring normal market fluctuations in the price of the actual stocks held by the fund.

Regardless of whether you take the distributions as cash or re-invest in the fund, that money is taxable income to you (unless the fund is owned inside a 401k or IRA or other tax-deferred investment program). You bought 56 shares at a price of $17.857 per share (net cost $1000). The fund distributed its earnings shortly thereafter and gave you 71.333-56= 15.333 additional shares. The new share price is $14.11. So, the total value of your investment is $1012, but the amount that you have invested in the account is the original $1000 plus the amount of the distribution which is (roughly) $14.11 x 15.333 = $216. Your total investment of $1216 is now worth $1012 only, and so you have actually lost money. Besides, you owe income tax on that $216 dividend that you received. Do you see why the mutual fund companies recommend against making new investments late in the year? If you had waited till after the mutual fund had made its distribution, you could have bought $1000/14.11 = 70.871 shares and wouldn't have owed tax on that distribution that you just bought by making the investment just before the distribution was made.

See also my answer to this recent question about investing in mutual funds.

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    Well, apart from the tax, he hasn't actually lost money. – Michael Borgwardt Dec 19 '14 at 14:52
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    I don't understand why he has lost money apart from the tax. He originally bought 1000$ worth of shares, now he has 1012$ worth of shares, so he gained a little bit. In your explanation it sounds like the dividend makes him lose money! But that's not true, because if he wouldn't have chosen to reinvest the dividend, he had gotten the 216$ in cash, but he would still hold 56 shares -> 56*14.11=790.16$ worth of shares. Add those two to get 1006$ -> he still has more money than before. How would a dividend make him lose money? [Feel free to correct me if I'm wrong] – Vincent Dec 19 '14 at 16:34
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    Be very careful buying mutual funds in December for exactly this reason. If you bought the fund in a retirement account, you're ok and the distribution is not a taxable event for you. Otherwise you're stuck with the tax consequences on $216 of extra dividend income, but it's a relatively tiny amount and worth the life lesson. – Rocky Dec 19 '14 at 16:56
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    "Total investment of $1216" No. $1216 has been spent on shares, but $216 of that came from the (dividend paid by the) account; it is not an additional investment, and does not represent a loss. The only loss is due to paying taxes on that $216... and will be offset by the reduction in capital gain in a future year. "You should not have done"... depends completely on information we don't have. Generally that's true, because the savings is in long-term capital gains which are assessed at a lower rate. But depending on OP's gross taxable income this year, it might still be better. – Ben Voigt Dec 19 '14 at 17:34
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    @BenVoigt: Since the $216 was reinvested, the OP's basis should now be $1216. (I guess that is what Dilip means by "total investment".) So if he were to sell today, he'd have $216 in taxable income from the dividend, but a capital loss of $1216 - $1012 = $204 which he could probably deduct. – Nate Eldredge Dec 19 '14 at 19:43
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It is very likely that the fund paid out a dividend in the form of reinvested shares. This happens with many funds, especially as we come to the end of the year.

Here's a simplified example of how it works. Assume you invested $1000 and bought 100 units at $10/unit. Ignoring the daily price fluctuations, if the fund paid out a 20% dividend, you would get $200 and the unit price would drop to $8/unit. Assuming you chose to reinvest your dividends, you would automatically purchase another $200 worth of units at the new price (so 25 more units). You would now have 125 units @ $8/unit = $1000 invested.

In your example, notice that you now have more shares than you originally purchased, but that the price dropped significantly. Your market value is above what you originally invested, so there was probably also a bit of a price increase for the day. You should see the dividend transaction listed somewhere in your account.

Just to confirm, I did a quick search on ICENX and found that they did indeed pay a dividend yesterday.

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