Average Cost
Robinhood defines Average Cost as the weighted average amount paid for shares (buys). It is calculated based on buy orders only; it doesn't change to reflect sell orders or the price of purchases that were transferred in via ACATS. It is also an input to the Total Return calculation which is as follows:
Total Return = (Market Price - Average Cost) * Total Shares
$513.11 = ($3,522.50 - $3,419.88) * 5
(calculation may reflect sub penny rounding)
Average Cost is intended as a reference point to “estimate” unrealized gains. It is not intended for tax purposes.
Average Cost and Cost Basis are not the same thing.
Cost Basis is used for tax purposes and is the original cost of an asset adjusted for any corporate action activity or wash sale loss disallowance. Robinhood uses the “First In, First Out” method. This means that your longest-held shares are recorded as having been sold first when you execute a sell order. The shares themselves are not specifically tracked, but the cost associated with those shares is expensed first.
If you wish to understand your cost basis, you can view your brokerage account statements or tax documents once they’re generated or consult a tax professional.
For more information about Cost Basis visit here.
Let’s take a look at a few examples of how Average Cost is reflected in the Robinhood app.
Example 1 - Multiple Purchases
When calculating your average cost, you must include all purchases which occurred as your position remained open. This calculation resets when you close out of a position in its entirety (0 shares). Reinvested dividends (DRIP) and fractional buys are also included in the calculation, on a weighted basis.
Example 2 - Multiple Purchases and Sales
If you have multiple trades (buys and sells) but never establishes a 0 position, the calculation for average cost will take the weighted buy prices against the current quantity of the position. When selling, only the quantity changes in the calculation-- the average buy prices will remain the same. As soon as a 0 position is established, the average cost calculation starts fresh.
Example 3 - Options
Buying and selling contracts outright has no impact on corresponding open stock positions' average cost, and premiums are not included in average cost calculations upon option expiration events (assignments, exercises). When a contract (or contracts) go through an expiration event, the resulting purchase of shares and their purchase price (aka strike price of the option) are added to the weighted average purchase price. The resulting sale of shares reduces the current quantity of the position. Said another way - if a long call is exercised or if a short put is assigned (resulting in the purchases of shares) the number of contracts x 100 shares per contract x the strike price is included in the average price calculation, much like the stock purchases above.
Robinhood does not provide tax advice. For specific questions, you should consult a tax professional.