How to calculate portfolio stock average?

Question

I want to find out how to calculate stock average price. I understand how to calculate average when you are buying shares, but I'm not exactly sure how to calculate the average when you sell shares.
Here is an example:

On day 1 I'm buying 1 share of ABCD for $10. My average is $10 per share.
On day 2 I'm buying 3 shares of ABCD for $12 each. My average is $11.50 per share ( (10 + 3*12) / 4 )
On day 3 I'm selling shares of 2 ABCD for $15 each. So, what is my average after this transactions?

Before selling, I've got 4 shares of ABCD:

ABCD bought for $10
ABCD bought for $12
ABCD bought for $12
ABCD bought for $12

I can imagine several ways to calculate average:

Selling transactions sells the first share that I've bought for $10 and the second one that I've bought for $12. So I'm left with 2 $12 shares and my average is $12.
Selling transactions sells the last 2 shares that I've bought. So I'm left with one $10 and one $12 share and my average is $11.
Selling transactions does not affect the average. So after the sell I still have $11.50 average.

Or maybe there is some other algorithm.
So the question is: what is the industry standard for calculating the portfolio average?

xirt · Answer

Yes - there are many ways to calculate an average depending on how you roll the sales back into the price of the stock.

The convention is that you only average the purchase price, while any gains or losses you receive from sales are not rolled back into the purchase price but counted separately as gains and losses.

On Day 4 your average price is the same as it was on Day 2, still $11.50 per share.  The sales on day 3 resulted in a gain of $3.50 per share using the average cost basis method.

Tax Rules

Where this sometimes gets complex is when it comes time to calculate your Schedule D for your (US) tax return.  How much profit did you make on the transaction?  You can use three different accounting methods: FIFO, Average Cost, or sell by ID (or more if your broker offers other options or algorithms).

How to calculate portfolio stock average?

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