I want to find out how to calculate stock average price. I understand how to calculate average when you are buying stocks, but I'n not exaclty sure how to calculate the average when you sell stocks.

Here is an example.

  • On day 1 I'm buying 1 ABCD stock for $10. My average is $10 per stock.
  • On day 2 I'm buying 3 ABCD stocks for $12 each. My average is $11.50 per stock ( (10 + 3*12) / 4 )
  • On day 3 I'm selling 2 ABCD stocks for $15 each. So, what is my average after this transactions?

Before selling I've got 4 stocks of ABCD:

  1. ABCD bought for $10
  2. ABCD bought for $12
  3. ABCD bought for $12
  4. ABCD bought for $12

I can imagine several ways to calculate average:

  • Selling transactions sells the first stock that I've bought for $10 and the second one that I've bought for $12. So I'm left with 2 $12 stokcs and my average is $12.
  • Selling transactins sells the last 2 stocks that I've bought. So I'm left with one $10 and one $12 stocks and my average is $11 * Selling transactions does not afect the average. So afther the sell I still have $11.50 average

Or maybe there is some other algorithm.

So the question is what is the industry standard for calculating portfolio average.

  • I have no clue what industry standards are. I use FIFO and any positions closed are in the books and that risk is gone. Same symbol? Different symbol? Gone! What remains open and at risk is averaged for current cost per share. – Bob Baerker Mar 25 '18 at 16:40
  • Bob, would you like to turn that into an answer? Another sentence or two and that would be that. – JTP - Apologise to Monica Mar 25 '18 at 16:49
  • At least for US the industry standard is to track each lot separately because you have the choice of designating specific lot(s) to sell and the broker must (since 2012ish depending on security type) be able to report to IRS basis for whichever lot(s) you designate(d) or be in violation of law. The default designation is FIFO, as @Joe said. – dave_thompson_085 Mar 26 '18 at 0:34
  • You mean Bob. I actually did not say anything this time – JTP - Apologise to Monica Mar 26 '18 at 0:36

Yes - there are many ways to calculate an average depending on how you roll the sales back into the price of the stock.

The convention is that you only average the purchase price, while any gains or losses you receive from sales are not rolled back into the purchase price but counted separately as gains and losses.

On Day 4 your average price is the same as it was on Day 2, still $11.50 per share. The sales on day 3 resulted in a gain of $3.50 per share using the average cost basis method.

Tax Rules

Where this sometimes gets complex is when it comes time to calculate your Schedule D for your (US) tax return. How much profit did you make on the transaction? You can use three different accounting methods: FIFO, Average Cost, or sell by ID (or more if your broker offers other options or algorithms).

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