AVG cost (again) please explain???

Hi All

I get the concept that AVG cost also takes into account you opprevious history on any one particular stock however I have a hard time following how the AVERAGE cost gets well up over a dollar- when it cant be traded at that value in the first place.

currently im holdin 1 only stock in No changer for the next NZ OCR, it cost me .92, my average cost is showing as $16.58. WTF? that doesnt seem likely as ocr stock dont typically move about that much anyhow. and I dont tend to pick them wrong esp that far in advance. so now it tells me I have lost $15 on this stock. If I did it was SO long ago I litetally cant remember - or find it in my 20+ pages of history.

any ideas how that would come about?

less extreme example in tha past I have a few stock that show my Av cost @ 1.15- how can this be? when I have only paid between 0-1

I struggled with this one as well. First off, it is not a representation of the average price you acquired your current stocks at. But what is it? Well I will try to explain with examples:

If you buy 10 shares for $0.50 and then sell 5 of them for $0.60 you have made a profit of $0.10 on each of the 5 shares you sold. That's a total profit of $0.50.

Now average cost will factor in this profit by dividing it by the remaining 5 stocks and subtracting it from the true average price you paid. So in effect your average cost for the 5 remaining stocks will be $0.40. What this tells you is that so long as you sell your remaining shares above $0.40 you will still have made a net profit for all of your trades on this contract.


Now an example of shorted stock:

If your short 101 shares @ $0.90 and then buy 100 of them back for $0.80. You will have made a profit of 100 x $0.10 = $10.00. So now you hold just one share. Average cost will take the total net profit for the contract ($10.00) and divide it by the number of stocks you currently hold (1). And add that value to the true average price. So $0.90 + $10.00 = $10.90.

Which means that so long as you buy back your 1 short share at less than $10.90 your total net profit for this contact will be positive. Of course it is impossible to buy back your share at a price greater than $1.00. So you will be in profit no matter what happens.

I hope this helps, if not, I'm sure Lanthanide or someone can explain it better.

Ah- Ok, so that fact that I currently only have 1 (as a reminder to myself to keep an eye on it) is effectively screwing the 'average price' beacuse its trying to calculate all my past (losses byt the looks of things) onto that one oustanding stock.

If I buy a bunch more the average loss will be spread further and become a better representation of my overall holding. It looks scary to make one trade and be down $15!

in the past I have held stock way longer than I would have preferred purerly to try and get them as close back to full closing price as possible.

Max is pretty much correct although his second example with +$0.90 in the average price is wrong.

admin could probably answer this fairly quickly, but I believe the way it works is that it keeps a simply history of what you paid, minus your returns, divided by remaining stocks.

Eg:
1. Buy 10 stocks at 50c each: you paid $5.00
2. Sell 5 stocks at 60c each: you returned $3.00
3. $5.00 - $3.00 = $2.00 divided by 5 remaining stocks = 40c average price

1. Buy 10 stocks at 80c each: you paid $8.00
2. Sell 5 stocks at 20c each: you returned $1.00
3. $8.00 - $1.00 = $7.00 divided by 5 remaining stocks = $1.40 average price

For shorting in Max's example:
1. Short 101 stocks at 90c each: you paid $10.10
2. Cover 100 stocks at 80c each: you returned $20.00
3. $10.10 - $20.00 = -$9.90 divided by 1 remaining stock = -$9.90 average price

In this shorting example, if the stock eventually closed at $0, you would be paid $1 by iPredict, so your total gain would be $20 from #2 + $1 closing, or $21 with an initial cost of $10.10, for a total profit of $10.90. If you'd kept all 101 stocks instead you would have a total gain of $101 with an initial cost of $10.10, for a total profit of $90.10.

Another way to think about it: if you have bought a stock, and your average cost is greater than $1, that means even if the stock closes at $1 you will have ultimately made a loss on the contract - if it closes at $0 you'll have made an even bigger loss of course. Similarly, if you have bought a stock and your average cost is less than $0, then even if it closes at $0 you will have ultimately made a profit on the contract - if it closes at $1 you'll have made an even bigger profit of course.

If the stock is shorted then it's the opposite: an average cost over $1 means you're guaranteed to have made a lifetime profit on the contract, and an average cost under $0 means you're guaranteed to have made a lifetime loss on the contract.

Very interesting... Thanks Lanthanide

Edit: Admin if you could comment just to clear things up once and for all that would be great.



Edited 1 time(s). Last edit at 06/11/2012 07:14PM by MaxTheCreator.

Actually the short situation is a bit funkier.

Eg if you short a stock at $0.90, it costs you 10c to do it, but the price that is displayed as your 'average cost' is $0.90, even though it actually only cost you 10c. This is so it stays in line with the "last price" column and is easier to compare for the rest of the calculations.

It looks like it is (-PriceYouPaid / NumberYouHold) + 1. Eg (-$10.10 / 101) + 1 = $0.90 average cost.

This lines up with my statements at the bottom of the post, where I say an average cost under $0 means you're gauranteed to have made a lifetime loss on the contract: in my example the calculations show an average cost of -$9.90 in the shorting case, but clearly we have made a profit so far.

So for shorting:
1. Short 101 stocks at 90c each: you paid $10.10. Average cost will show $0.90.
2. Cover 100 stocks at 90c each: you returned $20.00
3. (-$10.10 + $20) / 1 + 1 = $10.90 average cost.

That's the same figure Max came up with, although we did it via different routes.

Would be happy if someone could confirm whether I've got this right or not.

Needs a better description like "days avg cost" or an an extra field that has that sell or buys av cost.

This is definitely a "feature" rather than a bug. If you haven't done much trading on a stock, then the "average cost" figure will be somewhat meaningful. If you've been doing a lot of trading on the stock, then you're likely to see negative values or values over 1. That's just how it works, and I'm quite happy to leave it as it is.

I have one stock of XXX.YYY with an average cost of $1.34

Completely meaningless.

However, people have gotten entrenched and will find it difficult to climb down at this point, irrespective of whether they have actually come understand what average cost really means.

Alan3285 Wrote:
-------------------------------------------------------
> I have one stock of XXX.YYY with an average cost
> of $1.34
>
> Completely meaningless.

Prices above $1 and below $0 are quite meaningful.

If you hold a positive number (long position), it means the contract would have to close at $1.34 for you to break even. Which it won't, so you know you're in trouble.

Or if you hold a negative number (short position), you know that even if it closes at $1 (the worst case) you'll have made a profit over the life of the contract. So you're laughing.

I don't defend the avg cost because I'm entrenched, I defend it because I find it informative.

I guess there are other statistics that could be displayed, such as daily gain or loss (for the individual stocks, not just overall)... but this would come under the category of feature requests.



Edited 1 time(s). Last edit at 06/23/2012 08:31PM by maxb.

We've gone around this path a lot of times. Initially I didn't understand 'avg cost' and therefore found it very confusing. But once you understand what it is telling you, it is actually quite useful.

I would be against any proposal that changed the existing behaviour, however I definitely support and encourage additional measures to be created and added, which as maxb point out is a feature request.

Thanks, I'm actually unsure of the finer details, and appreciate the traders putting in their two cents. I will talk with the computer team soon and get back to you.