Calculating the Weighted Average Price of Stock; The most scientific way of calculating CGT

Investors generally maintain several portion of stock over the time period. The currently burning issue of the stock market i.e. the calculation of Capital Gain Tax on the profit made through the sale of shares has been a topic of discussion for investors, regulatory bodies as well as all the stakeholders.

Recently, the Securities Board of Nepal (SEBON), Nepal Stock Exchange (NEPSE) and CDS and Clearing Centre have suggested the Government to calculate the CGT on weighted average price.

Here are the steps to calculate a weighted average trade price:

1. List the various prices at which you bought the stock, along with the number of shares you acquired in each transaction.
2. Multiply each transaction price by the corresponding number of shares.
3. Add the results from step 2 together.
4. Divide by the total number of shares purchased.

The investors have been in confusion about the method of weighted average and how the calculation will be made. Here are few scenarios regarding the calculation of base price of stock as per the weighted average method.

Scenario 1: Purchase through secondary market

If you bought equal number of shares over a series of transactions, then the calculation becomes quited easy. Simply adding up the prices and dividing by the number of transactions will give us the base price of the share. Let us suppose that you buy 50 units of shares of a company at Rs 100 then you buy another 50 units at Rs 120 per share through secondary market. Then the base price through weighted average method will be

However, in real life scenarios, purchasing equal number of shares not practiced. So, for instance, if you have been purchasing shares of a company for years in various prices.

Then the calculation of base price of share would be:

The base price would be Rs 158.33

Scenario 2: Inclusion of right share

A shareholder can purchase the right share at its par value i.e. Rs 100 in the Nepalese stock market. In the above mentioned example, if there is an added quantity of 20 unit right shares at par value, then;

The base price in this case would be Rs 143.75

Scenario 3: When bonus share are received from the company.

When bonus shares are received from the company, the shareholders do not have to pay any amount for receiving the bonus shares. For instance, when 10 units bonus is received in scenario 1. The base price will be calculated as

The base price in this scenario will be Rs 135.71.

These are the few scenarios for calculating the base price of the share as per the weighted average method. The calculation of Capital Gain Tax will be made on the basis of the obtained base price.

However, there are certain pros and cons to the method of calculation as well.

Pros:

1. Investors have to pay capital gain tax only on the amount left after deducting its cost price. 
2. Investors don't have to pay gain tax on loss amount.  
3. There will not be hassle for keeping different price for calculating CGT of IPO, Bonus/Right, FPO and Secondary Share.

Cons:

1. Now it will be hassles for investors to segregate the IPO/BONUS/RIGHT and Secondary Share and its average cost price.
2. Investors holding IPO shares since decade also need to pay tax at Par value. Holding period is not considered.
3. Due to lack of accurate data with NEPSE, initially there can be leakage of tax.

It could be the most scientific method of calculating CGT if data management of each investor is done accurately by NEPSE.