How Do I Determine the Cost Basis of Stocks?

Figuring out the cost basis of stocks is important for knowing how much each share costs, what you are responsible for regarding capital gains tax and figuring out how much each stock is worth after a split. The original value cost basis is the easiest to determine, because this is simply how much each stock is worth when purchased. Trade value is one of the more important formulas for the cost basis of stocks, because this determines how much you report for capital gains tax. When there is a split, you can figure out how much each stock is worth based on the split value. For realistic cost basis calculations, the commission paid for the investment is added into the formula.

Small investors tend to know the value of each stock, because they purchase only a few shares at a time. Large investors also can determine how much each stock is worth, because they likely know how much money they invested. To discover the original cost basis of stocks, it's simply a matter of knowing the full investment and the number of shares purchased. For example, if the investment is $20,000 US Dollars (USD), and 500 shares were purchased, then the investment price is divided by the number of shares, in this instance leaving a cost basis of $40 USD per share.

When you sell the shares, another formula is used to determine your capital gains tax. The original value of the shares is subtracted from the current value, and that is multiplied by the number of shares sold. For example, if the original value is $40 USD per share and the current value is $50 USD, then there is a profit of $10 USD per share; if 300 shares are sold, then there is a $3,000 USD cost basis of stocks.

A company often splits its stock as it grows. This does not affect your investment, but it does change the cost basis of stocks. If the company splits by three and you have 1,000 shares that initially cost you $3,000 USD, then you would end up with 3,000 shares. The number of split shares divided by the original investment would give a cost basis of $1 USD per share.

In a realistic investment setting, you will have to pay a commission when purchasing stock. This fee should be added to the original investment, so you know the true amount you are spending on an investment. A $300 USD commission on a $20,000 USD purchase would result in a real, total investment of $20,300 USD.