How to Calculate Average Cost Per Share

Calculating the average cost per share is important for investors to understand investment performance and manage tax obligations. This metric is the average price paid for each stock share in a portfolio. It provides a clearer picture than the current market price, especially when shares are acquired at different times and prices.

Calculating Your Initial Average Cost Per Share

Average cost calculation is simplest for a single stock purchase. To determine your initial average cost per share, sum the total cost (share price multiplied by number of shares, plus transaction fees or commissions). Divide this total cost by the number of shares acquired.

For example, if an investor purchases 100 shares of a company at $50 per share and pays a $5 commission, the total cost of the investment is $5,005 (100 shares $50/share + $5 commission). The initial average cost per share is $50.05 ($5,005 / 100 shares). This establishes the baseline cost for shares in the investor’s portfolio.

Adjusting Average Cost with Additional Purchases

Average cost per share becomes dynamic with subsequent purchases of the same stock. Each new purchase requires recalculation to reflect updated total investment and shares. This process can result in “averaging down” if new shares are bought at a lower price than the previous average, or “averaging up” if bought at a higher price.

To adjust average cost, add the total cost of the new purchase (shares price + commission) to the existing total cost of previously acquired shares. Similarly, add the number of shares from the new purchase to existing shares. The updated average cost per share is found by dividing the new total cost by the new total shares. For instance, building on the previous example, if the investor buys an additional 50 shares at $45 per share with another $5 commission, the new purchase costs $2,255 (50 shares $45/share + $5 commission). The combined total cost becomes $5,005 + $2,255 = $7,260, and the total shares become 100 + 50 = 150. The new average cost per share is $7,260 / 150 shares = $48.40.

Impact of Selling Shares on Average Cost

When an investor sells a portion of their shares, the average cost of remaining shares does not change for personal tracking. This is because average cost reflects the overall average price paid for all shares acquired; selling some does not alter the historical cost of those not sold.

For tax reporting purposes, the Internal Revenue Service (IRS) requires specific identification of shares sold or uses a “first-in, first-out” (FIFO) method if not specifically identified. However, for personal tracking of your holdings’ cost, if you had 150 shares at an average cost of $48.40 and sold 75, the remaining 75 shares still have an average cost of $48.40. Gain or loss on sold shares is calculated based on their cost basis ($48.40 per share in this average cost scenario) and selling price.

Why Tracking Average Cost Matters

Tracking average cost per share is important for assessing investment performance and fulfilling tax obligations. Knowing your average cost helps determine if your investment is profitable or at a loss, providing a clear benchmark against the current market price. This insight helps make informed decisions on holding, buying more, or selling shares.

From a tax perspective, the average cost per share, part of your cost basis, is important for calculating capital gains or losses when you sell shares. Brokerage firms report cost basis information to the IRS on Form 1099-B, helping investors accurately report gains and losses on tax returns, Form 8949. Maintaining accurate average cost records prevents tax reporting issues and helps ensure correct tax payment on investment income.