How to Calculate Average Stock Costs

One of the fundamental principles of investing in the stock market is to buy low and sell high. However, determining the cost basis of your stock holdings can be a bit tricky. This is where calculating the average stock cost comes in handy. In this article, we will discuss what average stock cost is and how to calculate it.

What is Average Stock Cost?

Average stock cost is the average price per share of a particular stock that you own. It is calculated by dividing the total cost of purchasing the stock by the total number of shares owned. This calculation is important because it helps you determine the cost basis of your stock holdings. The cost basis is the original price you paid for the stock, plus any commissions or fees.

Why is Average Stock Cost Important?

Knowing your average stock cost is crucial for several reasons. First, it helps you keep track of your investments and monitor their performance. Second, it helps you make informed decisions about when to buy, sell, or hold onto a particular stock. Third, it helps you calculate your capital gains or losses when you sell your stocks.

How to Calculate Average Stock Cost?

Calculating average stock cost is a simple process. Here are the steps:

Step 1: Determine the total cost of purchasing the stock. This includes the price per share, plus any commissions or fees paid to buy the stock.

Step 2: Determine the total number of shares owned.

Step 3: Divide the total cost of purchasing the stock by the total number of shares owned.

For example, let's say you bought 100 shares of XYZ stock at $10 per share, and you paid a commission of $10 to buy the stock. The total cost of purchasing the stock would be $1010 ($10 x 100 + $10). If you later buy another 50 shares of XYZ stock at $12 per share, and you pay a commission of $5 to buy the stock, the total cost of purchasing the additional shares would be $605 ($12 x 50 + $5). The total number of shares owned would be 150 (100 + 50). To calculate the average stock cost, you would divide the total cost of purchasing the stock ($1615) by the total number of shares owned (150), which equals $10.77 per share.

Investment Strategies Using Average Stock Cost

Knowing your average stock cost can help you make informed investment decisions. For example, if the current market price of a stock is below your average stock cost, you may want to hold onto the stock or even buy more shares to lower your average stock cost. On the other hand, if the current market price of a stock is above your average stock cost, you may want to sell the stock to lock in your profits.

In conclusion, calculating average stock cost is a simple yet essential step in managing your stock investments. Knowing your average stock cost can help you monitor your investments, make informed decisions, and calculate your capital gains or losses. By using this simple calculation, you can take control of your investments and make the most of your stock portfolio.