Hi AIMster,
The issue with "average cost" is that it can be 0 or even negative.
For example, if I purchase 10 shares for $100, my average cost is $100 / 10 shares or $10 per share. If these shares then rise to $100 and I sell one share, my "average cost" then becomes $0 / 9 shares or $0 per share.
If I sell 2 shares at $100 per, my "average cost" becomes negative $100 / 8 shares or -$12.50 per share. Similarly, a case could be made to decrease "average cost" when dividends are paid out (since dividend payments decrease the value of the company, a dividend event could be viewed as selling a piece of the company and paying out the proceeds to shareholders).
From one perspective that makes sense, but to me, that perspective is attempting to combine profit and average cost into one number when they should really be separate.
Your average cost should always greater than zero. It might be a very low number (such as 2 cents per share), but it should never be 0 or less (unless someone gave you the shares or paid you to take them I suppose, but that opens another can of worms). The other number, your profit, will take into account the realized gains you make when selling.
