So i run a small retail business, and i also am an investor in some stocks.
My question: Lets say i buy 100 shares of XYZ at $10.00 per share.
The price plunges to $5 a share, and i buy 20 more shares to help offset the prices.
Now, in doing this, my average stock price will not be $7.50 it should be around $9 or so. What formula can be used to figure out the exact price.
THe same should hold true with inventory purchases correct?
Your total investment is $1100. Your total ownership is 120 shares. Your average price per share is $9.17. However, the current market value is only $5.
So, bascially, I don’t know what you’re asking.
This depends upon the business, of course, but a FIFO (first in, first out) inventory valuation system is generally more useful than an average. You treat the inventory as separate lots with separate costs.
Formula: n1p1 + n2p2 / (n1+n2)
Where N is the number of stocks in each batch and p is the price. Basically, it’s the total investment divided by total stocks owned.
In your head, it’s slightly easier to ballpark. Let’s say there’s a high price, B, and a low price, A. You’ve bought a different number of stocks at A than at B.
Imagine A and B on a number line, with a bar in the middle:
A-----------|---------B
Figure out a nice, round ratio of # bought at A (n1) and # bought at B (n2). For you, it’s 20 and 100, or 1:5.
Move the bar so that it separates the number line into segments matching that ratio. Be sure to move it toward whichever side has the bigger N, since it has more weight. Here, the A side is 5 times as big as the B side.
A----------------|----B
I think you might want to talk to a financial councilor and discuss something called (I think) “investment averaging”.
For example; Let’s say you want to put $12K into a fund. Instead of putting it all in at once, put in $1K each month for 12 months. That way you’ll spread your investment over the high’s and low’s of the stock’s range; losses of the higher-cost buys when the value drops will be offset somewhat by raises when the stock goes up of shares you buy when its low.
The exact price of what and for what purpose? If you’re talking about pricing for the purpose of inventory accounting, then it depends on the accounting method that’s used. Usually you choose either LIFO (latest unit’s price), FIFO (oldest unit’s price), weighted average price (what you did – just add up your total cost and divide by the number of units purchased). Which method to use can be tricky and will affect results in the firm’s income statement and balance sheet.
You need to consult an accountant. The rules regarding determining cost basis can vary significantly.
For instance, in the U.S., you may not use an average cost method to determine your cost basis for stock investments. At all times, you are selling specific shares of stock. In contrast, for mutual fund shares, you are allowed to to use an average cost method to determine your cost basis. For inventory, nivlac outlines some of the cost accounting methods typically employed.