Purchase price can be referred to a number of different things depending on the “context” of the conversation. With that in mind, here’s how we’re categorizing it.
The purchase price is the price someone pays for something, which could be a service, product or investment. The specific purchase price is important because that’s the base for calculating whether the purchase is a gain or loss. Purchase prices would include commission and sales charges paid for an investment, the weighted average cost being used for multiple purchases of the same security.
Purchase Price Explained
If we’re using an “investor” example, it would be something like this;
An investor buys 100 shares of XYZ stock on 4 different dates over a 5 year period, including 100 shares purchased at a market price of $40, $60, $80 and $100 per share. In order to determine the cost basis of the purchases, the investor would need to calculate the weighted average cost, this would be the total dollar amount of the purchases divided by the number of shares purchased.
(Total Amount Of Purchases) Divided (Shares Purchased)
With each having 100 shares, the dollar amounts of XYZ stock purchases would be $4,000, $6,000, $8,000 and $10,000 or a total of $28,000, the purchase total is divided by 400 shares, which equals a total of $70 per share.
If this investor would add a stock position, he/she can calculate a new weighted average price. They would need to add the dollar amount of the new purchases and the additional shares into the equation. This formula can be adjusted for stock sales, such as the investor only selling a portion of holdings. With commission costs added, the weighted average cost might approximate $72 per share.
The Differences Between Realized and Unrealized Gains
Investors have to be familiar with the purchase price as its used to calculate gains or losses for tax purposes. This activity is reported on Schedule D of IRS form 1040. An investor reports a realized gain if he or she sells some or all of his or her investment holdings. If he or she sells no securities, the investor has an unrealized gain or loss, which would not be reported for tax purposes.
Let’s end this with one more example. A investor sells 100 shares of XYZXYZ stock at a sale price of $90 per share and uses the weighted average cost of $72 to calculate a realized gain of $28 per share. The investor would report the number of shares, along with the weighted average cost and the sale price per share on a Schedule D form. The total realized gain of $2,800 would be classified as long term because the investor held the shares for over one year. The $2,800 long-term capital gain is offset by any capital losses, and the net gain is taxable using capital gains tax rates.
*Accelerated Analytics publishes resources like this to provide insights to different analytical metrics, data points and formulas. POS Analytics. Please be aware, this doesn’t mean that our product will this metric, data point or formula. To learn exactly what our reporting covers, please feel free to schedule a demo or give us a call. Thanks for understanding.