All what an investor pays or is required to pay for an investment. Cost basis includes brokerage fees, commissions or the so-called “loads” (i.e., one-time commissions that certain investees or fund management firms charge on purchases or sales of investments such as shares in mutual funds), and other trading costs.
Cost basis is usually adjusted to account for certain corporate actions such as dividend payout, mergers, stock splits, etc.
Cost basis is essential for calculation of capital gains or losses. If an investor can sell an asset/ investment for more than its cost basis, a capital gain will result. If such an asset/ investment is sold for less than its cost basis, a capital loss arises.
Cost basis calculations may be straightforward under normal situations (i.e., simple holding plans, involving uniform investments and maturities, etc.)
Holdings of shares of stock which feature similarities may involve simple calculations of the cost basis. However, holdings of different classes with different risk-return profiles and time horizons, may necessitate complicated calculations. Furthermore, the cost basis for bonds can be more complicated and often daunting, as original cost may have different bases (trading at par value (face value), at a premium, or at a discount.
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