Introduction to The Cost Basis of Positions - P/L and Cost

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 × quantity before buying +the price of this buying × quantity) ÷ the quantity held after buying

Implication

Average Cost is the average buying price of the currentposition (do not include commission and other fees). Only buy executionschange the average cost. The profit and loss when you sell the securities doesnot change the cost, but generates the realized profit and loss.

Eg.1. Opening aposition

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 withinthe holding period - Total amount of Sell executions within the holding period)÷ Quantity

                   =（200×200-0）÷200

                   = 200

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

                  =（0+200×200）÷ 200

                  = 200

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

Eg.2. Reduceposition, follow eg.1.

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

Diluted Cost = (Total amount of Buy executions withinthe 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, butthe profit and loss = (210-200) × 100 = 1000 turns into Realized P&L.

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

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 withinthe 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 × quantity before buying +the price of this buying × quantity) ÷ the quantity held after buying

               =（200×100+205×100）÷200

               = 202.50

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