Something must be done about the Average Cost

It should only show that average cost of the currently held stocks.

I think the method of calculation should be something like this:

((previous avg. * previous holdings) + (cost of new stocks * new stocks)) / total holdings


Example

Action___________Calculation_________________________Average Cost____Holdings
Buy 20 @ 0.50____((0 * 0) + (0.50 * 20)) / 20______________0.50___________20
Buy 10 @ 0.23____((0.50 * 20) + (0.23 * 10)) / 30_________ _0.41___________30
Buy 33 @ 0.75____((0.41 * 30) + (0.75 * 33)) / 63__________0.5881_________63

This should work for both buy and sell.
If part of a position is closed the average should stay the same.
I have written the calculation section as I would if I was programming.


If this can not be done. I recommend that the Average Cost be removed.



Edited 1 time(s). Last edit at 01/13/2012 09:06AM by MaxTheCreator.

We've had lots of debates about this. As I understand it, average cost used to work the way you propose above, but was changed to the current method.

I have actually come to find that the current method is more useful, once I got my head around exactly how it works.

I would be in favour of giving traders the ability to choose one format or the other. Certainly I think keeping average cost as it is now is far preferable to simply removing it.



Edited 1 time(s). Last edit at 01/13/2012 10:38AM by Lanthanide.

I admit I do not fully understand the current system, despite having read forum posts on the subject. But, I fail to see how the current system is in anyway "Average Cost"

It is your total historical 'average cost' of your current stockholding.

If I buy 10 stocks at 0.5000, my average cost is 0.5000 because I spent $5 to buy 10 of them. If I then sell 5 stocks for 0.8000 and get a return of $4, my average cost drops to 0.2000 because I have effectively 'spent' $1 to buy 5 of them.

In practice this means if the current price were to drop down to 0.3000 and I sold my remaining 5 stocks, overall my revenue was $5.50 and my profit was 50 cents against my initial investment of $5.

By continually adjusting the average cost based on your total sale and purchase history, you know at any time that if you sell stocks below your current average cost you are crystallising losses and if you sell them above your current average cost you are realising profit.

Once you end up with an average cost that is negative, it means that even if the stock closes at $0, you've still made a profit.

Above scenario is inverted if you're shorting stocks, in which case an average cost above $1 is preferable because if it closes at $1 you'll still have made profit equal to whatever the difference is.

Really what would be best is if Average Cost worked the way you outlined, and we had a new column that was Total profit/loss that would display the sum of all previous profit and loss on this contract + the current profit/loss based on the current price and your current holding.



Edited 1 time(s). Last edit at 01/13/2012 01:21PM by Lanthanide.

Ok, I think I understand now. Thanks Lanthanide for taking the time to explain. I would agree about having 2 columns.

Lanthanide Wrote:
-------------------------------------------------------

>
> Really what would be best is if Average Cost
> worked the way you outlined, and we had a new
> column that was Total profit/loss that would
> display the sum of all previous profit and loss on
> this contract + the current profit/loss based on
> the current price and your current holding.


Or, alternatively, being able to choose ones preferred method for displaying profit/loss.

I see that this is an old topic but average cost is one thing that bugs me on this site.

I bought 10 at .50 then sold 10 at .80. Thats cool.

But then I go and buy some more say another 10 at .50 and all of a sudden my average cost is a lot lower than .50. But the initial purchase was sold, I took my profit. The next purchase is a totally new trade and I do not really want past trading to impact on the average cost on this trade. It just complicates matters so I would rather not have the function.

That said that is my view. there are probably others who like it the way it is.

Cheers