Investors who buy and sell stocks regularly need to calculate the amount of gain or loss realized with each sale. When you sell stock for more than the cost basis, you realize a gain. If you sell the stock for less than his basis, you realize a loss. To determine if you have a gain or a loss, you need to know his basis for each share of stock. Four accounting methods exist for determining the basis of stock. These include first-in, first-out (FIFO), last-in, first-out (LIFO), average cost and specific identification.
The FIFO method assumes that you sell the stock in the chronological order that you purchased it. You should keep records of each stock purchase, including the quantity of shares received and the total price paid. Divide the total price by the quantity to calculate the cost for each share. This cost per share is calculated separately for each purchase. When you sell some shares, use the cost for that number of shares from your first purchases as your stock basis.
The LIFO method, or last-in, first-out method, assumes you sell the most recent stock you purchased first. Uses your records of stock purchases to calculate the cost per share. When you sell a portion of your shares, use the cost for that number of shares from his most recent purchases as your stock basis.
The average cost method calculates the same cost for all shares owned. Add up the total number of shares you own along with the total cost you paid for all of the shares. Divide the total amount paid by the number of shares to determine an average cost. This cost becomes your stock basis.
The specific identification method requires you to choose specific shares to sell. When you choose this method, you choose a specific order for selling the stock. This includes selling shares with the highest cost first, or selling shares with the lowest cost first. You can also segregate the shares between the length of time you hold the stock, such as short-term or long-term.
- Stockbyte/Stockbyte/Getty Images