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Stocks go up or down solely on supply and demand.

Assume that the majority of those selling Apple (AAPL) shares are doing so for tax purposes. Let's also say that there is a combo of long and short term sellers yielding tax rates of 15% to 35%, not including the additional tax rates from individual US states or any International tax rates.

Now let's say that the majority of Apple's recent sellers want to buy right back into AAPL shares. Well the fact of the matter is that they would only be able to do so at a reduced share count. Why? Because those previous sold shares require tax payment on those profits. In order to cover one's tax bill, it would be smart to put that money aside for when it comes time to write Uncle Sam a big fat check.

There is absolutely nothing wrong with sending Uncle Sam a fat check. Chances are you're doing so because you made a decent profit on those 1,000 AAPL shares. Unfortunately, the only down side is that those 1,000 shares you sold will not allow you back in at a 1,000 share buy-in. Here's why:

  1. AAPL currently trades at $520
  2. Your average profit per share is $300
  3. Your average tax bill percentage on that $300 profit is 20% (Your holding period is a combo of long and short term.)

Based on your 1,000 share count sold, you walked away with $520,000 in cash and have a tax bill of $60,000 ($300*20%). This leaves you with a final cash tally of $460,000 to go back and buy AAPL stock. Your 1,000 shares that you just sold only allow you to buy back 884 shares - an automatic 11.6% reduction in the amount of shares ((1000-884)/1000).

If everyone did the above at the end of the year for tax purposes, AAPL shares would automatically get reduced from the current $520 to the $460 area. But in reality, shares this month were at a high of $585-590 and that $590 minus our exercise's 11.6% yields a share price of about $520.

I hope this simple exercise has helped to bring some light on the recent drop in AAPL shares.

Here are some factors that we will never know about AAPL sellers:

  1. AVG profit per sold share
  2. AVG taxes paid on those profits
  3. Number of sellers willing to buy back AAPL shares

What it all really comes down to is we need to know the AVG percentage of leftover money people have when buying back AAPL shares. In our case above, we were only able to buy back 88.4% of our original 1,000 shares.

Overall, in our heads we can automatically figure out that the number of repurchased shares would be a reduced one. We just don't know by how much, but in a sense that really doesn't matter since that's most likely 100% of the cause for the recent market drop.

Conclusion

Remember, stock prices go up and down based on supply & demand. In this case, demand is automatically reduced by sellers turning around and becoming buyers, but at a reduced share count due to the fact that sellers cannot be buyers at exactly what they just sold AAPL since the tax man gets his share of profits.

Source: This Could Be Why Apple Shares Are Down

Additional disclosure: I plan on purchasing more AAPL shares throughout the end of 2012.