Probability of losing a certain amount of money to an investment?

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Discussion Overview

The discussion revolves around the probability of achieving a specific profit from an investment in a stock, particularly focusing on the conditions under which a stock's value may increase or decrease. Participants explore the implications of stock price movements, investment strategies, and the mathematical considerations of probability in this context.

Discussion Character

  • Exploratory, Technical explanation, Debate/contested, Conceptual clarification

Main Points Raised

  • One participant states a plan to invest $100,000 in a stock with a minimum value of $50,000 and a maximum of $120,000, asserting an 85% probability of losing money and questions the probability of raising exactly $5,000.
  • Another participant argues that under a continuous distribution, the probability of achieving an exact profit amount is zero, suggesting a need for a range of values instead.
  • A different participant questions the rationale behind focusing on the stock closing higher and suggests that the goal should be framed as raising $5,000 or more, which would avoid the issue of specifying an exact price.
  • One participant expresses that there is insufficient information to make a determination about the probability of meeting the investment goal.
  • Another participant interprets the scenario as involving a broker's instructions to sell at a profit of $5,000 and discusses the relevance of the stock's maximum and minimum values, questioning the implications of the stated probabilities on price movements over time.

Areas of Agreement / Disagreement

Participants express differing views on how to approach the probability of achieving the investment goal, with no consensus on the correct interpretation of the scenario or the mathematical implications involved.

Contextual Notes

There are limitations in the information provided, including assumptions about stock price behavior, the lack of clarity on the number of shares involved, and the implications of continuous versus discrete probability distributions.

moonman239
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So, let's say that I plan to buy a stock for $100,000. The record minimum value of the stock is $50,000. The record maximum value is $120,000. The probability of losing money is 85%. My goal with the stock is to raise $5,000, no more no less. Not taking into account how frequently stocks from the same company are sold for that price, what is the probability of meeting this goal?
 
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moonman239 said:
My goal with the stock is to raise $5,000, no more no less. Not taking into account how frequently stocks from the same company are sold for that price, what is the probability of meeting this goal?
Assuming a continuous distribution, the probability of raising any exact amount is zero.
 
My goal with the stock is to raise $5,000, no more no less.

Why would any rational investor worry that the stock price closed higher, especially since this stock is so risky?

Maybe you meant $5,000 or more no less. This would also satisfy the requirement that you don't specify an exact price which makes the probability zero. Use a range of prices and the problem will make more sense.

Another thing...stock prices are usually quoted in price per share. I doubt you meant that a share is worth $100,000. Maybe you should state that you plan to buy 10,000 shares at a price of $10 per share.
 
Not really enough info to go off
 
Oh, I get it. You've given your broker instructions to sell as soon as the stock's value increases to a value that nets you 5,000 profit. This would be a time series where the stock price moves with each tic of the clock. Right? There should be a greater than zero probability that the stock reaches this price in time. Not sure how to calulate this probability. And why are the max / min values relavent? Does an 85% chance the stock will lose money mean that each tic of the clock there is a 0.85 probability the price will decrease and a 0.15 probability that it will increase? If so then by how much (1% maybe)? I guess if the price reaches zero then the game is over.
 

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