How average cost price is calculated
When you buy the same stock at different prices, your average cost price is the weighted average — total amount invested divided by total shares held.
Example: You buy 100 shares at ₹150, then 200 more at ₹120 when the price drops.
Total invested = (100 × ₹150) + (200 × ₹120) = ₹15,000 + ₹24,000 = ₹39,000
Total shares = 300
Average cost = ₹39,000 / 300 = ₹130 per share
If the stock now trades at ₹140, your unrealised profit is (₹140 - ₹130) × 300 = ₹3,000.
Averaging down vs averaging up
Averaging down means buying more shares when the price falls below your first purchase price, lowering your average cost. Averaging up means buying more as the price rises — common in momentum strategies.
Both are legitimate, depending on why you’re buying. If a stock falls because the business fundamentals deteriorated, averaging down increases your exposure to a weakening company. If it fell due to market panic or unrelated sector rotation, averaging down on a sound business is often rational.
The mistake is averaging down purely because the price is lower, without re-examining why it fell. Most retail investors in India do this instinctively — it’s called the sunk cost trap.
FIFO vs average cost for tax purposes
When you sell shares, the capital gain calculation depends on which shares you’re assumed to have sold first. SEBI and the Income Tax Act use FIFO (first in, first out) for listed equity shares sold on exchanges. Your broker’s tax statement will show FIFO-based cost for each sale.
The average cost shown here is for your own tracking and decision-making — to know your breakeven price and unrealised P&L. It does not override FIFO for tax. Use the capital gains calculator for tax computation on actual sales.
Sources
- Income Tax Act 1961, Section 112A — LTCG on listed equity shares (FIFO method for cost of acquisition)
- SEBI: Guidelines on portfolio statements and cost of acquisition for equity — broker trade confirmation norms