October 22, 2009
Stock day trading – B, suppose that not long after he sold stock and while the price is still $10 a share, he has some new savings available.
Since his stock and reserve values are already equal, if he applies his standard ratio on the new capital he invests half of it in stock. But this causes him to buy stock at the same price at which he sold recently; so he has wasted the expense and trouble of buying and selling. To reduce this risk, Mr. B adopts a second ratio. On buying stock, he continues using his old standard ratio of 1 to 1. But for selling stock, he sets a higher standard ratio, $1.
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