For understanding how the cost basis of stock works, we’ll simply define it as the average stock price you get after purchasing a number of shares of different price ranges held by a single firm/company by investing different amounts of money. The cost basis of the stock can be referred to as the amount you initially invested in buying shares against different rates. This helps to calculate the generated profit on the invested amount as well as the number of withstanding taxes after selling out of the investment.
In an alternate scenario, you can also calculate the average stock profit when you buy ten or more shares of a stock at a single/one price. To calculate it, simply take the market value of the stock and subtract it from the amount you have invested initially to purchase the shares. Over time as investment rises, the cost basis of the stock remains constant. What changes the cost basis is when you purchase the additional shares of the original investment.
Tax Purpose of Cost Basis
As discussed above, cost basis also operates tax handling because the tax can only be paid on capital gains (an increase in the value of the stock at the moment it’s sold) and not be paid on the whole investment value.
For example; in case you purchase 200 shares at a stock price of $10 each, the cost basis would come out as $2,000. Supposedly the share price increased to $15 each, the cost basis would become $3,000. To calculate a capital gain, subtract the stock’s market value from initially invested funds ($2,000 – $3,000) = $1,000. So, you’ll have to pay tax on $1,000 rather than $3,000.
How to calculate the average stock price?
To purposefully calculate and determine the average stock price, you’ve to be aware of the exact number of shares you purchased at the specific market value or share price. To do so, you’ll be needing an average formula that is;
Cost basis = (p1 x q1 + p2 x q2 + p3 x q3 + …… + pi x qi) / n
n = total number of shares purchased
p1 = Purchase price of 1st bought shares
q1 = Number of 1st bought shares
p2 = Purchase price of 2nd bought shares
q2 = Number of 2nd bought shares
p3 = Purchase price of 3rd bought shares
q3 = Number of 3rd bought shares
pi = Purchase price of last bought shares
qi = Number of last bought shares
So, keeping in consideration your knowledge about the concept of weighted average, you’ll now know that cost basis is actually a weighted average of alternate prices, with the weights precisely given by the exact number of shares purchased consecutively on each level.
For Example, if you want to calculate the cost basis of the average stock price, take the above-discussed formula and calculate it if;
p1 = 95 USD
q1 = 1
p2 = 88 USD
q2 = 1
p3 = 77 USD
q3 = 1
p4 = 75 USD
q4 = 1
p5 = 74.5 USD
q5 = 1
p6 = 76 USD
q6 = 1
Then, the total number of shares is;
n = 6
Wherefore, the average stock price, or the stock cost basis, is:
Cost basis = $80.91 USD
To verify this result, you can go and run this calculation on the advanced Stock Average Calculator by putting the quoted values given in the above example.
How to calculate stock profit or loss?
Soon after you’re done calculating the cost basis of stock, there’s one more calculation to perform to obtain the stock profit. To calculate so, we represent you the formula as;
Stock Profit = (Current Stock Value/Price – Cost Basis) x n
Where n = the total number of shares.
Let’s Suppose, the stock price of AMD (Advanced Micro Devices) stock jumped from 80.91 USD to 100 USD per share, then the stock profit would be calculated as;
Stock profit = ($100 – $80.91) x 6
Stock profit = $ 114.54 USD
Furthermore, if you want to calculate stock profit with deep precision with brokerage fees included, you need to perform this calculation by using our renowned and authentic Stock Average Calculator.
But wait! What about calculating stock profit in percentage notion? We truly consider this as a necessary aspect that you should be aware of whilst calculating the average stock profit. You can also use the average stock price calculator for this purpose where you just have to put the current stock price and you’ll get exact profit results in percentages.
Profit percentage = ((Current stock price – Cost basis) /Cost basis) × 100%
Profit %age = ((100 USD – 80.91 USD) / 80.91 USD) × 100%
Profit percentage = 23.59%
Dividend Notion of Stock Average Calculator
Apart from the stock profit calculator, the dividends and their precise performance are worth mentioning. Here rises a query about how to calculate the stock profit that includes dividends too. To do so, simply go to the stock average dividend calculator and put the cost basis value in the share price tab. You’ll get on point and rounded off results at the end.
How to use the cost basis for investing?
- Initially, go for calculating the cost basis or stock average price you invested already in order to buy your shares.
- If your company exhibits improvement in its performance and you’re deeply convinced of the excellence of your firm, grow your limits and set up a standard by purchasing more shares at relatively lower stock prices than before, if possible.
- Elucidate new and enhanced cost basis including the effects of newly purchased stock shares.
- Calculate and obtain the consequent upside and downside and unrealized/non-convertible capital gains.
- Lastly, calculate new stock profit using the dividend notion, if applicable.