In trading, the weighted average method calculates the average cost of all units of a security you own, instead of tracking each purchase price separately. When you buy the same security at different times and prices, this method combines all purchases, then divides the total cost of all units by the total number of units. This gives you an average cost for that instrument.
Why does Trading 212 use a weighted average?
We utilise the weighted average method because it’s simple and widely used around the world. This helps us better support clients globally and comply with tax and reporting requirements. Its ease of calculation, especially with frequent trades or dividend reinvestments, makes it more convenient than tracking each purchase individually.
💡 Example
You make the following purchases of Company ABC shares:
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January 10th: Buy 100 shares at €50 per share. (Total cost: €5,000)
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February 15th: Buy 50 shares at €55 per share. (Total cost: €2,750)
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March 20th: Buy 75 shares at €48 per share. (Total cost: €3,600)
First, we calculate the total cost and total number of shares:
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Total Shares: 100 + 50 + 75 = 225 shares
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Total Cost: €5,000 + €2,750 + €3,600 = €11,350
Next, we determine the weighted average cost per share:
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Weighted Average Cost per Share: €11,350 / 225 shares = €50.44 (approximately)
Now, let's say on April 1st, you decide to sell 150 shares of Company ABC. When you sell 150 shares, the cost basis for those shares will be the weighted average cost we just calculated:
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Cost Basis (for the 150 shares sold): 150 shares * €50.44/share = €7,566
Calculation of Capital Gain/Loss (assuming a selling price of €52 per share):
- Proceeds from Sale: 150 shares * €52/share = €7,800
- Capital Gain: €7,800 (Proceeds) - €7,566 (Cost Basis) = €234
After the sale, your remaining shares of Company ABC would be:
- Remaining Shares: 225 - 150 = 75 shares
- Cost Basis of Remaining Shares: 75 shares * €50.44/share = €3,783