Purchase price is the consideration, which acquiring party pays for an investment. The purchase price includes any commission and the transaction costs. Purchase price becomes the investor’s cost basis for calculating gain or loss when selling the investment.

The weighted average cost is used for multiple purchases of the same security.

Purchase prices is a value agreed upon by two or more parties. The transaction may or may not involve a negotiation, but it always involves an agreed price.

Commercial transactions are usually straightforward: one person sells a product, service, or asset, and another person buys it at face value.

According to an example cited by Investopedia, an investor buys 100 shares of Ford common stock on three different dates over a five-year period, including 100 shares purchased at a market price of $40, $60 and $80 per share. To determine the cost basis of the purchases, the investor needs to calculate the weighted average cost, which is the total dollar amount of the purchases divided by the number of shares purchased.

At 100 shares each, the dollar amounts of Ford stock purchases are $4,000, $6,000, and $8,000, or a total of $18,000, and the purchase total is divided by 300 shares to equal $60 per share. If the investor adds to the stock position, they can calculate a new weighted average price by adding the dollar amount of the new purchases and the additional shares to the calculation.

The formula can also be adjusted for stock sales if the investor only sells a portion of the holdings. With commission costs added, the investor’s weighted average cost might approximate $62 per share.

Investors use the purchase price of an investment to calculate realized gains or losses for tax purposes and dividend payouts.

An investor reports a realized gain if they sell some or all of their investment holdings. If they sell no securities, the investor has an unrealized gain or loss, which is not reported for tax purposes.

Assume, for example, an investor sells 100 shares of Ford stock at a sale price of $80 per share and uses the weighted average cost of $62 to calculate a realized gain of $18 per share. The investor reports the number of shares, along with the weighted average cost and the sale price per share, on Schedule D. The total realized gain of $1,800 is long term because the investor held the shares for over one year. The $1,800 long-term capital gain is offset by any capital losses, and the net gain is taxable using capital gains tax rates.