Purchase Price

What Is the Purchase Price?

The purchase price is the price an investor pays for an investment, and the price turns into the investor's cost basis for ascertaining gain or loss while selling the investment. The purchase price incorporates any commission or sales charges paid for the investment, and the weighted average cost is utilized for various purchases of a similar security.

Understanding Purchase Price

Expect, for instance, an investor purchases 100 shares of Ford common stock on three unique dates more than a five-year period, including 100 shares purchased at a market price of $40, $60 and $80 per share. To determine the cost basis of the purchases, the investor needs to compute the weighted average cost, which is the total dollar amount of the purchases partitioned by the number of shares purchased.

At 100 shares each, the dollar amounts of Ford stock purchases are $4,000, $6,000, and $8,000, or a total of $18,000, and the purchase total is separated by 300 shares to rise to $60 per share. In the event that the investor adds to the stock position, they can compute another weighted average price by adding the dollar amount of the new purchases and the extra shares to the calculation.

The formula can likewise be adjusted for stock sales on the off chance that the investor just sells a portion of the holdings. With commission costs added, the investor's weighted average cost could inexact $62 per share.

The Differences Between Realized and Unrealized Gains

Investors utilize the purchase price of an investment to compute realized gains or losses for tax purposes, and they report that activity on Schedule D of IRS form 1040. An investor reports a realized gain in the event that they sell some or all of their investment holdings. In the event that they sell no securities, the investor has an unrealized gain or loss, which isn't reported for tax purposes.

Expect, for instance, an investor sells 100 shares of Ford stock at a sale price of $80 per share and uses the weighted average cost of $62 to work out a realized gain of $18 per share. The investor reports the number of shares, along with the weighted average cost and the sale price per share, on Schedule D. The total realized gain of $1,800 is long term in light of the fact that the investor held the shares for more than one year. The $1,800 long-term capital gain is offset by any capital losses, and the net gain is taxable utilizing capital gains tax rates.