The weighted average cost per share is calculated by considering both the number of shares purchased and the price paid for each purchase. This approach provides a more accurate reflection of the average cost than a simple average, especially when shares are acquired at different prices.
Weighted Average Calculation Explained
Here's a step-by-step breakdown of how to calculate the weighted average cost per share:
- Multiply: For each purchase, multiply the number of shares acquired by the price per share. This gives you the total value for each purchase.
- Sum: Add up all the total values calculated in step 1. This gives you the total investment value.
- Total Shares: Add up the total number of shares acquired across all purchases.
- Divide: Divide the total investment value (from step 2) by the total number of shares (from step 3). The result is the weighted average cost per share.
Formula
The calculation can be summarized with the following formula:
Weighted Average Cost per Share = (Total Value of All Purchases) / (Total Number of Shares)Example
Let's illustrate with an example:
| Purchase | Number of Shares | Price per Share | Total Value |
|---|---|---|---|
| 1 | 100 | $10 | $1000 (100 * $10) |
| 2 | 200 | $12 | $2400 (200 * $12) |
| 3 | 150 | $11 | $1650 (150 * $11) |
| Totals | 450 | $5050 |
Calculation:
- Total value of all purchases: $1000 + $2400 + $1650 = $5050
- Total number of shares: 100 + 200 + 150 = 450
- Weighted average cost per share: $5050 / 450 = $11.22 (approximately)
In this example, the weighted average cost per share is approximately $11.22.
Practical Insights
- Accuracy: The weighted average is more accurate than a simple average, especially when purchasing different quantities at different times and prices.
- Tax Implications: It's important to track your weighted average cost per share for tax purposes when selling shares, as it helps calculate your capital gains or losses.
- Investment Tracking: Tracking your weighted average allows for precise monitoring of your investment performance.
Key Takeaway
According to the reference, "To calculate the weighted average cost per share, the investor can multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares."
