What is 'Purchase Price'

A purchase price is the price an investor pays for an investment, and the price becomes the investor’s cost basis for the calculation of a gain or loss when the investment is sold. The purchase price includes any commissions or sales charges paid for the investment, and weighted average cost is used for multiple purchases of the same security.

BREAKING DOWN 'Purchase Price'

Assume, for example, an investor buys 100 shares of Ford common stock on three different dates over a five-year period, including 100 shares purchased at a market price of $40, $60 and $80 per share.

Factoring in Weighted Average Cost

To determine the cost basis of the purchases, the investor needs to calculate weighted average cost, which is defined as the total dollar amount of the purchases/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 divided by 300 shares to equal $60 per share. If the investor adds to the stock position, he can calculate a new weighted average price by adding the dollar amount of the new purchases and the additional shares to the calculation. The formula can also be adjusted for stock sales, if the investor only sells a portion of the holdings. Assume, with commission costs added, the investor’s weighted average cost is $62 per share.

The Differences Between Realized and Unrealized Gains

Investors use the purchase price of an investment to calculate realized gains or losses for tax purposes, and that activity is reported on Schedule D of IRS Form 1040. A realized gain is reported when the investor sells some or all of his investment holdings, and if no securities are sold, the investor has an unrealized gain or loss, which is not reported for tax purposes.

Assume, for example, 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 calculate a realized gain of $18 per share. The number of shares, along with the weighted average cost and the sale price per share, are reported on Schedule D. The total realized gain of $1,800 is considered long term, since the shares were held for more than one year. The $1,800 long-term capital gain is offset by any capital losses, and the net gain is taxable using capital gain tax rates.

RELATED TERMS
  1. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  2. Specific-Shares Method

    A personal financial accounting method that, when used properly, ...
  3. Average Up

    The process of buying additional shares at higher prices. This ...
  4. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  5. Gain

    An increase in the value of an asset or property. A gain arises ...
  6. Portfolio Weight

    The percentage composition of a particular holding in a portfolio. ...
Related Articles
  1. Managing Wealth

    What Determines Your Cost Basis?

    In any transaction between a buyer and seller, the initial price paid in an exchange for a product or service will qualify as the cost basis. When it comes to securities and related financial ...
  2. Managing Wealth

    Know Your Stock Cost Basis

    Understanding equity cost basis is critical for tracking the gains or losses of an investment.
  3. Taxes

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  4. Investing

    The Weighted Average Of Outstanding Shares

    The quantity of a company’s outstanding shares changes when it issues new shares, repurchases or retires existing ones, or converts others.
  5. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  6. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  7. Investing

    Don't Lose Your Shirt On Mutual Fund Sales

    Mutual funds aren't guaranteed profit-makers, but with the right calculations and timing, you can avoid major losses.
  8. Investing

    Calculating The Gain Or Loss On An Investment

    Calculating the percentage of change in an investment is easy. Take the amount the investment gains and divide it by the amount invested.
  9. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
  10. Managing Wealth

    What Are Unrealized Gains And Losses?

    Gains or losses become “realized” when the stock is sold.
RELATED FAQS
  1. How do you calculate the cost basis for a mutual fund over an extended time period?

    Investors must pay taxes on any investment gains they realize. Subsequently, any capital gain realized by an investor over ... Read Answer >>
  2. What is the weighted average of outstanding shares? How is it calculated?

    The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring ... Read Answer >>
  3. What's the smallest number of shares I can buy?

    Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number ... Read Answer >>
  4. How do I figure out my cost basis on a stock investment?

    The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center