About the average cost
The average cost, as the name suggests, is the average acquisition price of assets on the stock exchange. It is the representation of the acquisition value of an asset, when it is traded more than once and with different values.
If, for example, you buy your asset at a price of $ 5.00, and in the following month you want to invest more in the same stock, which is already worth $ 7.00, and later you buy more for $ 6.75 . If so, what is your average price? There is a calculation to know how much your average price will be.
Why is average cost important?
So, to calculate your profit, you need to know your average price. The calculation of the average price is one of the most important for your portfolio. Only with it will you be able to know the real amount paid for your asset. It is also worth remembering that the average price is used for the income tax return.
The average cost strategy
Yes. The average price can also serve as a tool for investors to recover or increase their profit.
In this strategy, investors aim to buy more lots of shares they already own in order to lower their average price, and thus increase their profit.
In order for the strategy to be used intelligently, it is important that the calculation be carried out before purchasing new lots of shares, so that it can be verified whether this really will be a good investment strategy for your case, because, if you do not plan correctly, you can increase your average price, and consequently decrease your profit.
How to calculate the average cost?
To calculate the average price of your asset, you will need to add up all the amounts you paid and divide by the number of shares. That is, if you bought 1000 shares for $5.00, then bought another 2000 for $4.35, then bought another 500 for $7.70, you would need to do the following calculation:
1000 for 5,00 = $ 5.000,00
2000 for 4,35 = $ 8.700,00
500 for 7,70 = $ 3.850,00
3500 shares for 17,550.00. Its average price is 5.01.
In this hypothetical case, if the share price is at 7.70, for example, you would be earning $2.69 per share, or $9,400 in total.
Tip:
If you usually trade a lot on the stock exchange, never forget to check the number of lots and their respective values, because only then will you be able to know their average cost.