June 20, 2019 | Investopaper
Depending upon the market sentiments, we buy a share of a certain company at different rates. For instance, when the Nepalese share market was on a bullish trend, higher share price of the companies were justified by everyday gain. On the other hand, during the bearish trend, the share price of the same company trading at a lower rate is not valued by the investor. One of the techniques to excel in your stock investments is to reduce the average price of your purchased shares.
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If you have performed a number of transactions while purchasing shares of a single company at a different rate, you need to know the average cost per share of that company. This is because it helps you to determine that at what price should your stock trade in order to break into the profit zone. Let me clarify this with an example.
Suppose you bought the shares of Deprosc Laghubitta at different rates when the market was signaling different sentiments. You bought 100 units of shares at Rs. 540. Similarly, the next 100 unit purchase cost you Rs. 500 per share and the last one cost was Rs. 450 per share for 50 unit shares. Now, if you want to know the weighted average price per share of the company, you can use the formula below.
In the above example, the weighted average price of DDBL is calculated as:
1st price*no. of shares = 540*100=54,000
2nd price*no. of shares= 500*100= 50,000
3rd price*no. of shares= 450*50= 22,500
Total number of shares = 250
Now, using the formula, the total weighted average price per share of Deprosc Laghubitta is Rs. 506. Hence, in order to gain profit in your total transaction of Deprosc Laghubitta, you have to sell your total shareholdings of the company above Rs. 506. Broker commission and other trading costs are not included in this example.
From this example, you must have noticed that buying shares of a company at a lower rate reduces the average price per share. This is one of the techniques to profit in the stock market. But this technique can also pile up your investment misery. So, we will further discuss more about this technique in our next article.
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