Introduction to The Cost Basis of Positions

Futuprovides two methods to calculate the cost basis of securities.

1. Diluted Cost

Formula

Diluted Cost = (Total amount of Buy executions withinthe holding period - Total amount of Sell executions within the holding period)÷ Quantity

Implication

Diluted Cost is the break-even price during the holdingperiod, which means you can sell at this price without profit and loss (do notinclude commission and other fees). This method takes into account the profitand loss of every transaction (cash dividends, rights issues have not beenconsidered yet) during the holding period. Both buy and sell executionschange the diluted cost. The profit and loss when you sell the securities willraise or lower the cost of positions, and even make it a negative number.


2. Average Cost

Formula

Average cost = (average cost before buying × quantity + the price of this purchase × quantity) ÷ quantity after the purchase

Implication

It is the average cost of the current position of a stock (excluding commissions and fees). Only purchases are considered. The gain or loss corresponding to the sale of a stock does not dilute the cost price, but is converted to realized gain or loss.


Eg.1. Opening A Position

If the customer does not hold Alibaba (BABA) before TDay, and buy 100 shares at $200/share on T Day, then 

Diluted Cost = (Total amount of Buy executions within the holding period - Total amount of Sell executions within the holding period)÷ Quantity

=(200×200-0)÷200

= 200

Average Cost = (average cost before purchase × quantity before purchase + purchase price × purchasing quantity) ÷ the quantity held after purchase

=(0+200×200)÷ 200

= 200

If the stock price rises to $205, compare the positions under the two methods.

Diluted  CostMarket PriceQuantityP&L

2002052001000

Average  CostMarket PriceQuantityP&LUnrealized     P&LRealized  P&L
200205200100010000



Eg.2. Reduce Position(follow eg.1.)

Suppose the customer sells 100 shares at $210/share onT+1 Day, then

Diluted Cost = (Total amount of Buy executions within the holding period - Total amount of Sell executions within the holding period)÷ Quantity

=(200×200-210×100)÷ 100

= 190

Average Cost = unchanged when selling stock = 200, but the profit and loss = (210-200) × 100 = 1000 turns into Realized P&L.

If the stock price rises to 215, compare the positions under the two methods.

Diluted  CostMarket PriceQuantityP&L

1902151002500

Average  CostMarket PriceQuantityP&LUnrealized     P&LRealized  P&L
200215100250015001000



Eg.3. Add Position(follow eg.2.)

If the customer buys 100 shares at $205/share on T+5 Day, then

Diluted Cost = (Total amount of Buy executions within the holding period - Total amount of Sell executions within the holding period)÷ Quantity

=(200×200+205×100-210×100)÷ 200

= 197.50

Average cost = (average cost before purchase × quantity before purchase + purchasing price × purchasing quantity) ÷ the quantity held after purchase

=(200×100+205×100)÷200

= 202.50

If the stock price rises to 215, compare the positions under the two methods.

Diluted  CostMarket PriceQuantityP&L

197.502152003500

Average  CostMarket PriceQuantityP&LUnrealized     P&LRealized  P&L
202.50215200350025001000