Cost basis

What an investment actually cost you: the purchase price plus every fee, tax and expense required to acquire it and make it usable.

Example

A 50,000 purchase with 1,500 of acquisition costs has a cost basis of 51,500, not 50,000.

Important

Using the sticker price instead flatters every return figure by the same silent mechanism. In one worked case it turned a true 31.46% into a reported 38.0%.

Related terms

• Return on investment (ROI) — Total proceeds less total cost, divided by total cost - the simplest measure of what an investment produced.
• Realised gain — The difference between what an asset actually sold for and its cost basis - a completed exchange that nothing afterwards can change.
• Fee drag — The compounding cost of fees over time, which is far larger than the fee's annual percentage suggests on its own.

Lessons that explain it

• Proceeds arrive as a large, concentrated, taxable event — An exit converts an illiquid holding into money, tax obligations and a decision about what to do next. Planning before the money arrives usually produces better outcomes than reacting afterwards. (11 min)
• ROI, and the one thing it leaves out — Return on investment is the simplest measure there is, and it is silent about time. Two investments with the same ROI can be wildly different propositions. (9 min)
• A loss here does not wait for a rebound, because there usually is not one — Most positions fail outright and stay failed - there is no price to watch and no recovery to wait for. What survives is a genuine tax provision that can exclude the entire gain on a winner, and an equally genuine cost most investors never total: their own uncompensated diligence time. (13 min)

All 578 terms in the Investing glossary