Average Cost

Average Cost

Formula

Average cost = (average cost before buying × quantity + the price of this purchase × quantity) ÷ quantity after the purchase

Implication

It is the average cost of the current position of a stock (excluding commissions and fees). Only purchases are considered. The gain or loss corresponding to the sale of a stock does not dilute the cost price, but is converted to realized gain or loss.

Eg.1. Opening A Position

If the customer does not hold Alibaba (BABA) before TDay, and buy 200 shares at $200/share on T Day, the closing price of BABA is $205, then 

Average Cost = (average cost before purchase × quantity before purchase + purchase price × purchasing quantity) ÷ the quantity held after purchase

=（0+200×200）÷ 200

= 200

Eg.2. Reduce Position(follow eg.1.)

Suppose the customer sells 100 shares at $210/share onT+1 Day, and the closing price of BABA is 215, then

Average Cost = unchanged when selling stock = 200, but the profit and loss = (210-200) × 100 = 1000 turns into Realized P/L.

Eg.3. Add Position(follow eg.2.)

If the customer buys 100 shares at $205/share on T+5 Day, and the closing price of BABA is 215, then

Average cost = (average cost before purchase × quantity before purchase + purchasing price × purchasing quantity) ÷ the quantity held after purchase

=（200×100+205×100）÷200

= 202.50