How Brokers Compute your Average

How do brokers compute for your average when you have added shares to a previous stock with lower buy entry price and decides to sell it later?

Your broker will not go over each shares you bought from a given date and select which one has the lowest entry and sell at a higher price.

Instead they will just get the total amount you paid divided by the total number of shares you have.

SAMPLE COMPUTATION
Breakdown: (fees included)

  5,000 @ ₱2.21 1st month    =11,082.61

10,000 @ ₱2.17  2nd month  =21,764.02

10,000 @ ₱ 2.05  3rd month  =20,560.48

25,000 shares                         ₱ 53,407.11  

Computed Average from broker: 

➤53,407.11 / 25,000 = ₱2.1363 average (or ₱ 2.1362844)

scenario:

➤current market price on the 4th month=₱2.17

➤you decided to sell 10,000 shares @ ₱2.17

Reflected on your Ledger will be computed as follows: 

➤10,000 shares x ₱2.17   = ₱21,505.78 (from calculator with fees)

less

➤10,000 shares x ₱2.1363 = ₱21,363.00 (using broker's computed average)

                               profit of ₱142.78

It will differ if you use the calculator if you try to sell per share you bought at a lower price as shown.

sample_stock_calculator

With the remaining 15,000 shares if current market price still at ₱2.17 

Reflected on your Portfolio will be computed as follows: 

➤15,000 shares x ₱2.17      = ₱32,258.66 (from calculator with fees)

less

₱53,407.11 less ₱21,363.00 = ₱32,044.11 (total amount less gross sales after selling)

                                     profit of ₱214.55

or the other way

➤15,000 shares x ₱2.17      = ₱32,258.66 (from calculator with fees)

less

➤15,000 shares x ₱2.1363 = ₱32,044.50(using broker's computed average)

                                     profit of ₱214.16 (difference due to rounding of numbers)

Granted you decided to add up when it retrace to a price of ₱2.10 this is how your broker compute your new average as follows:

Using your calculator  10,000 shares x ₱2.10 with fees=₱21,061.95 amount paid

With your previous ₱2.1363 ave price x 15,000 shares remaining=₱32,044.50

Add both 

➤₱32,044.50 + ₱21,061.95=₱53,106.45 (total amount paid) 

divide with total number of shares which is now at 25,000 shares 

➤₱53,106.45 / 25,000 = ₱2.1242 (reflected on your portfolio).

Quite confusing at first but soon you will get the flow how it is done. Just remember they sum up all the total amount you paid then divided by the total number of shares to get your average.

If you find this helpful, say thanks by sharing this site to others!