What is Stock Average Cost?
Stock Average Cost (SAC), also known as cost basis or average price, is the total average price you have paid per share across all your purchases. Understanding your SAC is like getting a reality check for your investment habits.
This metric helps you determine if your investments are profitable and is essential for calculating capital gains or losses when you sell.
How to Calculate Stock Average Cost
The formula for Stock Average Cost is simple:
[\text{Stock Average Cost} = \frac{\text{Total Purchase Amount}}{\text{Number of Shares Owned}}]
Where:
- Total Purchase Amount is all the money you have spent on buying shares
- Number of Shares Owned is the total number of shares you currently hold
Calculation Example
Suppose you spent $9,600 buying stocks and now own 48 shares.
- Total Purchase Amount: $9,600
- Number of Shares: 48
[\text{Stock Average Cost} = \frac{9{,}600}{48} = 200]
Your average cost per share is $200.
Multiple Purchase Example
You made three purchases of the same stock:
- Purchase 1: 20 shares at $50 = $1,000
- Purchase 2: 30 shares at $45 = $1,350
- Purchase 3: 50 shares at $55 = $2,750
Total invested: $1,000 + $1,350 + $2,750 = $5,100
Total shares: 20 + 30 + 50 = 100
[\text{Stock Average Cost} = \frac{5{,}100}{100} = 51]
Your average cost is $51 per share, even though individual purchases ranged from $45 to $55.
Why Average Cost Matters
For Profit/Loss Calculation
If the current stock price is $60 and your average cost is $51:
- Unrealized gain per share: $60 - $51 = $9
- Percentage gain: ($9 / $51) × 100% = 17.6%
For Tax Purposes
When you sell shares, you need to report capital gains or losses based on your cost basis. The average cost method is one IRS-approved way to calculate this.
For Investment Decisions
Knowing your average cost helps you:
- Decide when to buy more (dollar-cost averaging)
- Evaluate if selling makes sense
- Compare performance across different holdings
Dollar-Cost Averaging
Many investors use dollar-cost averaging, investing fixed amounts at regular intervals regardless of price. This strategy naturally creates a favorable average cost over time, reducing the impact of market volatility.