Definition of Average Cost

Average Cost is a method used to determine the cost of an investment for an investor who has made multiple purchases of the same security at different times and prices. An investor’s average cost may be used to determine a cost base for tax purposes or to evaluate the profitability of an investment program such as dollar cost averaging. The formula used to determine average cost is:

Average cost = Total dollars invested /Number of shares purchased

Applying "Average Cost" to Securities Exams:

The desired outcome for a customer who uses dollar cost averaging is that their average cost will be lower than the average selling price of the security.

month 1: $100 invested $20 share price 5 shares purchased
month 2: $100 invested $12.50 share price 8 shares purchased
month 3: $100 invested $10 share price 10 shares purchased
month 4: $100 invested $25 share price 4 shares purchased
total $400 invested $67.50 price 27 shares purchased

Average Cost:$400 / 27 $14.81

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