The share price is calculated by earning per share multiplied by the price to earnings ratio. Share price=Earning per share*P/E ratio. This article will be learning how to calculate the average stock price of a stock.

The average share price of the stock position in the portfolio is calculated based on the FIFO (first-in, first-out) method, in the case of an overnight holding period i.e. delivery of stock.

This calculation can be helpful to investors to calculate their tax liability or to keep the track of their profits and losses, etc. The average share is calculated by using the following formula total cost of purchase of share divided by the number of shares.

Mathematical explanation: If a purchased 100 shares at ₹100 and another 80 shares at ₹80, so the average price is ₹91 ((100*100)+(80*80)/180).

In the tabular format.

Date | Action | Price | Quantity | Total |
---|---|---|---|---|

10 Feb | Buy | 100 | 500 | 50000 |

20 Feb | Buy | 150 | 1000 | 150000 |

133.3 | 1500 | 200000 |

What is the FIFO method? FIFO means first in, first out, this is an inventory keeping method in accounting and business in general. This same method is used for calculating the average share price of a stock.

In this method, the first share purchased at a particular price is sold first, followed by another.

For example, If you purchase 10 stocks at 100 and another block of 10 stocks at 200. Later on, sold 10 shares at 150 in this case the earlier stock purchased, is considered the purchase price i.e.10 and the total profit of 500 (50×10).

The above process is the same when you sell stocks and buy them again i.e. short selling.

**How is the average stock price after selling?**

As the average share price is calculated as the FIFO method.

The value of the share left in the Demat account of a particular stock is calculated as follows.

- First purchase on 10 Jan of 10 shares of 100 each.
- Second Purchase on 12 Jan of 20 shares of 150 each.
- And sold on 15 Jan, 15 shares at 120 each.

**What will be the average price after selling the remaining shares?**

Date | Share price | Quantity | Action | Total |
---|---|---|---|---|

10 Jan | 10 | 100 | Buy | 1000 |

12 Jan | 20 | 150 | Buy | 3000 |

15 Jan | 15 | 120 | Sell | 1800 |

Sell Breakdown of profit and loss.

Quantity | Buy Price | Sell Price | P/L |
---|---|---|---|

10 | 100 | 120 | 200 |

5 | 150 | 120 | -150 |

Net | 50 |

Value of the remaining stocks in the portfolio.

Quantity | Price | Total |
---|---|---|

5 | 150 | 750 |

Also read this article: What is a depository?

**In the case of buying and selling of stocks on the same day i.e., Intraday trading of the stock following explanation stands true**

Date | Action | Price | Quantity | Total |
---|---|---|---|---|

12 Sept | Buy | 100 | 500 | 50000 |

25 Sept | Buy | 150 | 1000 | 150000 |

25 Sept | Sell | 170 | 1000 | 170000 |

Average price | 100 | 500 | 50000 |

The following happens in the case of Intraday trading

**On 12 Sept**

Buy order quantity of 500 shares at ₹100 each

The total cost of 50000 and the average price of ₹100 each.

**On 25 Sept**

- 1st transaction: Buy order quantity of 1000 shares at ₹150 each.
- 2nd transaction: Sell order quantity of 1000 shares at ₹170 each.

The same process is true in the case of short selling. Suppose in the above case if an investor would have sold 1000 shares at ₹170 and then brought them back at ₹150 per share, this transaction will be considered trading, and this will reflect in the position in your stock brokerage app.

Since intraday transactions are not considered in calculating average share price the value of shares purchased on 12 Sept i.e. ₹100 per share will be considered as the average cost.

This will be the final holding portfolio look like:-

Date | Action | Price | Quantity | Total |
---|---|---|---|---|

12 Sept | Buy | 100 | 500 | 50000 |

To learn more go to Uptox.com

**Disclaimer**

I (financialwizardindia.com) am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation.

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