How to Calculate Average Price Using FIFO?

•6 min read•by Angel One

FIFO uses a "first-in, first-out" logic to calculate the average price, assuming the oldest shares are sold first. The weighted-average method tracks costs for tax reporting and portfolio P&L accuracy.

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Trades in parts seldom have the same prices. A weighted average of the selling or buying of various units at varying prices identifies the average traded price. Rather than displaying single trade prices, it displays the weighted cost of quantities. This comes in handy in the analysis of portfolio value, determination of realised gains, and determination of open positions. Trades may occur between days or within minutes, but on a daily basis or a minute-by-minute basis, the average traded price is much better able to provide the picture of exposure and results, particularly in lively trading fields, where execution prices fluctuate.

Key Takeaways

The average traded price reflects the true cost of holdings when trades happen at different prices and quantities.
FIFO assumes the earliest bought shares are sold first and is commonly used for tax and P&L reporting.
Partial sell changes the average traded price based on which lots exit under FIFO logic.
Knowing FIFO-based averages improves clarity in profits, losses, and portfolio tracking.

What is Average Traded Price?

When you buy multiple units of an asset, such as the stock of a company, the price of each unit may differ. In that case, the average traded price is the average price at which these units were bought overall. For example, if I bought TCS stocks at different prices on different days, such as 10 stocks at ₹3,000, 20 stocks at ₹3,100 and 5 stocks at ₹3,200, then the average traded price of the 35 stocks in total will be: [(3000*10) + (3100*20) + (3200*5)] = ₹3,085.71

What is FIFO in Average Traded Price Calculation?

First In, First Out (FIFO) is a method in accounting, whereby the impact of assets that came in first in our books is counted first, while the impact of those assets that came in later in our books is counted later. In the context of average traded price, FIFO is a method used to choose the particular stocks whose prices will be considered for the calculation of the average traded price at a point in time, especially after the sale of some of the stocks.

The FIFO method is used to report profit and loss (P&L) in your income tax filings.

Note: Shares of intraday trades are not considered at all while calculating the average trading price of holdings, as intraday shares are not technically part of your holdings.

Also Read: What is Income Tax

Examples of Average Price Calculation Using FIFO

Example 1:

Suppose you have made the following buy transactions of a stock named XYZ, as per the data in this table:

Trade Date	Symbol	Type	Qty	Rate (in ₹)
1/8/2023	XYZ	Buy	50	444
3/8/2023	XYZ	Buy	30	439
9/8/2023	XYZ	Sell	20	443

In the above table, 20 shares have been sold on 9th August (in the third row). As per the FIFO method, these 20 shares are out of the first 50 shares that had been bought at ₹444 on 1st August (in the first row). Therefore, on 10th August, 30 shares will be remaining from the first batch of 50, and 60 shares will be remaining overall.

Let us now understand this example in terms of the price: Average traded price on 4th August of your XYZ holdings: [(₹444*50)+(₹439*30)]/(50+30) = ₹442.12 Average traded price on 10th August of your XYZ holdings: [(₹444*30)+(₹439*30)]/60 = ₹441.5 Notice: The reduction of 20 shares has happened out of the shares priced ₹444 and not the shares priced ₹439, as the shares priced ₹444 were bought first. This is because of the FIFO method.

Example 2:

In the above example, the quantity of shares sold was less than the quantity of shares bought on the first day. Let us now see how the average price will change if the selling quantity is larger than the quantity that was bought first.

Trade Date	Symbol	Type	Qty	Rate (in ₹)
1/8/2023	XYZ	Buy	50	444
3/8/2023	XYZ	Buy	30	439
9/8/2023	XYZ	Sell	60	443

In this situation, all the 50 shares bought on 1st August, as well as 10 of the 30 shares bought on 3rd August, will be considered sold. Therefore, only 20 of the shares bought on 3rd August will be considered to be remaining. Thus, the new average trading price on 10th August will be: (₹439*20)/20 = ₹439

Example 3:

Now, let us look at an example where the quantity sold is equal to the quantity bought in the first two days. Notice that there has been a third day when shares were bought and a second day when shares were sold.

Trade Date	Symbol	Type	Qty	Rate (in ₹)
1/8/2023	XYZ	Buy	50	444
3/8/2023	XYZ	Buy	30	439
9/8/2023	XYZ	Sell	80	443
10/8/2023	XYZ	Buy	40	440
16/8/2023	XYZ	Sell	10	438

In this case, on 17th August, there will be only 30 shares left with the average traded price of ₹440. This is because all the shares bought at ₹444 and ₹439 will have been considered sold already on 9th August.

Example 4:

In this example, the quantity is bought for delivery first and sold on the same day.

Trade Date	Symbol	Type	Qty	Rate (in ₹)
1/8/2023	XYZ	Buy	50	444
3/8/2023	XYZ	Buy	30	439
9/8/2023	XYZ	Buy	80	443
16/8/2023	XYZ	Buy	10	440
16/8/2023	XYZ	Sell	10	450

In this case, on 16th August, before buying the 10 qty in delivery, the average price was ₹442.56 (total 160 shares). After buying the 10 shares, the average price becomes ₹442.41 (now 170 shares). Once the user sells 10 qty the same day, it’s treated as an intraday knock-off against the same-day buy, so the average price again becomes ₹442.56.

Also Read: What is the Stock Market

Why are Average Traded Price of Some Shares Not Shown Correctly?

Issues in showing the correct average trading price mayarisee due to the following reasons:

Those shares were transferred from a broker other than Angel One. In that case, the average traded price will have to be manually entered.
If the stock has been obtained via an ESOP, then the average price will be shown as 0. You can fix it by contacting us.
If the company is undergoing a corporate event like a bonus or a stock split, then the buy average will go through an adjustment. The average traded price will be automatically updated within a few days after the record date. A stock going through such an adjustment may also temporarily show an outdated price. But not to worry, as the price will soon be updated in a matter of a few days.
It may also take a while to update the average traded price and P&L of stocks received as gifts.
For off-market transactions, the average trading price is taken to be the closing price in the market on the day the stocks were transferred. You can, however, edit the price.

Final Words

The awareness of the average price traded gives clarity to the way gains and losses are recorded in trading statements. It eliminates the misunderstandings created by various entry prices and assists in setting the expectations with the real outcomes. This insight enhances the monitoring of performance within the delivery trades, intraday activity, and derivatives. It also has a role to play during tax reporting and strategy review, where cost accuracy is concerned. Due to time, the quality of the decision becomes better as the traders do not use individual prices due to their familiarity with the average traded price; they use the real position cost expressed in all trades completed.

FAQs

What is the formula for calculating the average price?

The mean price traded is obtained by dividing the total value that is traded by the total quantity. Multiplication of trade prices by the number of units and summation of the results, followed by division by the total number of units. This is then average cost of trade and is not a mere average. It provides an improved picture when the quantities vary between trades. The traders apply this technique to assess positions and compute profits or losses without paying attention to the execution price of each.

Is it better to use LIFO or FIFO?

While both approaches influence the way average traded price and realised gains are visible, using LIFO is prohibited under the Income Tax Department (under ICDS II) and Indian Accounting Standards (Ind AS). So, between FIFO and LIFO, FIFO is a preferred and mandated method. FIFO ensures better valuation of inventory, matches with actual goods movement (perishable goods), and complies with regulatory requirements.

How to calculate the average in F&O?

In F&O, the weighted approach of determining the average price of trade is the same as that of equities. The price of each contract is multiplied by the number of lots, and the sum thenis then divided by the total number of lots. This average trade price assists in monitoring the effect of margin, mark-to-market, and exit planning. The derivatives are highly adjusted; therefore, the average traded price is used to avoid the confusion arising due to the swift changes in prices and the bailout of the partial position.

How to calculate using the FIFO method?

In FIFO, units sold are regarded as those that were purchased first. Gains are calculated by matching the sold quantities to previous purchase prices and then proceeding chronologically. The rest units stipulate the average traded price of open positions. FIFO is cost trackable and conforms to conventional accounting. It is effective when the investors accumulate positions over a period of time and when they prefer stable reporting of the realised and unrealised performances.