Find average share cost by counting the shares

Averaging two purchase prices can give the wrong average cost for the holding. If the dollar payments are equal, the lower price buys more shares. Count those shares before dividing total cost.

Investor.gov describes dollar-cost averaging as equal investments at regular intervals regardless of market movements. Its purchase mechanism does not guarantee that the closing price will exceed the average cost.

Start with the transaction record

Consider two invented monthly purchases of $120 each. The first executes at $12 per share and the second at $8. Exclude fees, taxes, distributions, splits and other transactions. Fractional shares are available, although both purchases here divide evenly.

The first $120 buys ten shares. The second buys fifteen. In total, $240 buys twenty-five shares, so average cost is $9.60 per share. The simple average of the two quoted prices is $10, because it gives the two dates equal weight.

Fifteen of the twenty-five shares cost $8. Their larger weight explains why the actual average is below $10. It is not an unexplained discount received from the seller.

Change the purchase rule

Buying ten shares on each date would cost $120 and $80, totaling $200 for twenty shares. Average cost would then be $10. That is a different transaction record with equal shares and unequal dollar payments. Do not combine its share count with the equal-dollar plan's $240 cost.

Check the ending value

Value the equal-dollar holding immediately after its second purchase at the supplied $8 price. Twenty-five shares are worth $200. Against $240 contributed, the shortfall is $40, about 16.67 percent. An average purchase cost below the simple price average has not produced a profit.

That percentage compares closing value with total money supplied. It is not an annualized or money-weighted return: the payments entered on different dates. The return-measure explanation examines those separate performance questions.

Compare an available alternative

If the entire $240 was available initially, buying at the first $12 price would acquire twenty shares, worth $160 at the later $8 price. The scheduled plan ends at $200 instead. Waiting to invest some money helped on this supplied falling path.

Reverse the prices to $8 first and $12 second. Scheduled purchases still acquire twenty-five shares, now worth $300. Investing the full $240 at the first date would buy thirty shares, worth $360 later. Assume unused cash earns nothing in either comparison.

The better result changes with the path. Someone receiving the second $120 only at its purchase date also lacked the initial lump-sum alternative. Keep cash availability beside prices before claiming one plan beat another.

For a personal account of ownership and choosing commitments, read the opening of Infinite Upside by Vijay Sheth.