Introduction to the cost basis of positions

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

Average Cost

Market Price

Quantity

P&L

Unrealized     P&L

Realized  P&L

200

205

200

1000

1000

0


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.

Average Cost

Market Price

Quantity

P&L

Unrealized     P&L

Realized  P&L

200

215

100

2500

1500

1000


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

Average Cost

Market Price

Quantity

P&L

Unrealized     P&L

Realized  P&L

202.50

215

200

3500

2500

1000