Average Cost Meaning & Definition

Trusted Experts

For more than 25 years we’ve helped students pass over 250,000 exams and we’ve done so with  industry leading pass rates!

Guaranteed to pass

Pass  our Greenlight guaranteed practice exam & we guarantee you’ll pass your exam – or your money back!*

Live chat & Phone Support

We’re with you every step of the way, from the time you purchase until the time you pass our trusted experts are here to answer all of your questions!

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.

Ex
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