What is a Break-Even Point?
The concept of a break-even point is common to both general business applications and in the trading process of securities and options. In both scenarios, the break-even point has to do with an equalizing of profits and expenses, with no real accounting for the apparent gain that takes place.
With business applications, the break-even point is focused on the generation of profit from the business endeavor. Essentially, the amount of revenue generated by the effort of producing, marketing, and selling a good or service is sufficient to cover all expenses. All expenses that are both directly and indirectly related to the business of the company will be included. This will involve the cost for raw materials, labor, equipment, facilities, storage, packaging, and transportation, along with any peripheral expenses. In the final analysis, the break-even point is the number of units that must be sold in order to completely recover the total cost of producing and marketing the goods. Ideally, the break-event point will be reached and then exceeded, resulting in a net profit for the business venture.
In like manner, the break-even point also comes into play with securities and options. Creating a balance between such factors as the put option and the call option with an eye toward arriving at the ideal strike price will help to determine the break-even point in the transaction. With stocks and similar investment opportunities, the break-even point is reached when the investor has recouped the initial cost of acquiring the investment, but has not yet realized any profit from the investment. Once the stock or security has begun to generate proceeds above and beyond the expenses associated with the option’s cost, the break-even point is considered to have been achieved and superseded.
Break-even points serve as important markers of indicators of the financial success or failure of any given venture. Deals that fail to reach a break-even point are generally considered to be a failure, and care will be taken before investing more funds into the stock or product in question. At the same time, the break-even point can also be a strong indicator of a sound financial investment, especially in situations where the point of breaking even is reached and exceeded in a relatively short time.
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