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How is the average price calculated
The 'total return' of a share consists of two things: the income you receive in dividends, and the capital growth that comes with an increase or decrease in the share or associated option price.
You can use timetotrade to calculate your total overall return taking into account both income and growth. To do so select the 'absolute cost' method when view your open positions.
Within the Open Positions section of the Investments tab the average price is displayed. When the 'absolute cost' method is selected, the average price for shares in a given company, is calculated by determining the total cost associated with the open position, divided by the number of shares owned. The total cost is based on the total expenditure associated with buying shares and options (including broker fees and stamp duty), less any income received from dividends or gains or losses associated with selling shares and options.
The traditional approach used by most portfolio tools in calculating the average price is to simply use the average expenditure associated with opening a position, for example buying shares, and then dividing it by the accumulated number of shares that you have bought. Traditionally the average price therefore does not factor in any gains or income that arise from for example, selling part of your holding in a particular stock or collecting dividends. As a result the traditional approach to calculating the average price effectively becomes a meaningless statistical figure that is open to interpretation, rather than a figure of any real value, after a number of transactions for a given symbol have occurred.
To address this timetotrade determine the total cost and average price for each open position by including all the related share, option and dividend transactions associated with that particular share/symbol in their calculations. By doing so the total cost and average price therefore accurately reflect your exposure to a position; or to put it another way, "how much of your own money you have left invested in a given position after allowing for receipt of money from selling shares or options and collecting dividends".
For example, assume that on the 1st of Jan 2006 you purchase 1,000 shares at a price of 100 pence per share, which results in a total expenditure of £1,000 and a resulting average price of £1 per share as illustrated in the following share transactions and open positions screen shot:
On the 1st of April 2006 the XYZ plc share price is trading at 130 pence and you decide to sell 400 shares; you sell the 400 shares at 130 pence, and so receive £520. You now own 600 shares and the deemed base cost is your initial investment less the £520 you received from selling some of the shares i.e. £1,000 - £520 = £480. And so, the average price per remaining share is the total cost of £480 divided by 600 shares, which equals an average price of 80 pence per share.
After selling the 400 shares, you are left with 600 shares. You have £480 invested and the shares are now valued at £780 (600 shares x 130 pence); the resulting gross profit on the money you have invested is £780 less £480, which equals £300. The gross percentage profit is £300 divided by £480, which equals 62.5%. The following screen shot illustrates these transactions:
Let us now assume that on the 1st of December 2006 the share price is still trading at 130 pence and you received a net dividend per share of 22.5 pence. The dividend essentially increases the overall return that has been made on the share. The £135 is returned to you through the payment of a dividend, and so to calculate its effect on the shares' overall performance, the total net dividend of £135 is deemed to reduce the base cost of the shares. Your total cost is now deemed to be £480 less the £135 dividend, giving you an overall cost of £345. You still own 600 shares therefore your average price per share is now reduced to 57.5 pence and the corresponding gross profit increases to £435, which is a gross percentage profit of 126.09% as illustrated in the following screen shot:
Now let you look at a new example for a US stock that involves making two share purchases, selling a covered call then buying it back and collecting dividends.
On the 5th of April 2007, 33 shares where purchased at £37.90 per share at a total cost of $1,263.65. On the 26 April 2007 a further 67 shares where purchased at $36.37 per share at a total cost of $2,449.74. The accumulated amount of money invested in building a position of 100 shares was $3,713.39 and the corresponding average price per share was $37.1339 as illustrated in the following screen shot:
On the 8th of May 2007 one American style Covered Call option contract for 100 shares was sold, which generated a gain of $65.04. As a result the total cost of $3,713.39 was reduced by $65.04 to $3,648.35 and the corresponding price per share was reduced to $36.4835 as illustrated in the following screen shot:
On the 15th of May 2007, a total net dividend of $17.85 was received, which further reduced the total cost from $3,648.35 to $3,630.50. Lastly on the 18th of May 2007, the Covered Call was bought back at total cost of $174.95. As this is an expenditure, then the resulting total cost was increased from $3,630.50 by $174.95 to $3,805.45 and the corresponding average price increased to $38.0545 as illustrated in the following screen shot:
In summary, any gains, losses or sources of income for a given open position are considered when calculating the total cost and corresponding average price. In doing so the total cost accurately reflects your exposure to a position i.e. how much of your own money have you invested in a position after all related share, options and dividend transactions are considered.
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