A cost price is a term used in retail circles to describe the specific value of an item sold as it relates to the unite price for that item. The identification of the cost price makes it possible to understand the amount of profit that is actually earned from the sale. This same general concept is sometimes employed in investment situations as a means of investors determining the real value they receive by holding onto specific types and amounts of stock options.
A cost price is normally determined by taking several factors into consideration. One has to do with the actual selling price of each unit, also known as the unit price. This figure does not take into consideration any taxes that are also assessed on the sale of that item. Along with identifying the unit price, it is also necessary to identify any expenses connected with the ownership and subsequent sale of the item. By deducting expenses from the actual amount of revenue generated by the sale, it is possible to determine the cost price.
Several variations to determining cost price occur in different settings. One approach calls for adding back all expenses associated with the asset acquisition and determining a specific percentage above and beyond that figure to set as the sale price. When this approach is applied to pricing goods offered for sale, this also includes allowing for freight and delivery charges, storage fees, and any other expense that is incurred between the time the goods are purchased and they are sold to consumers.
With stock options, identifying the cost price is important to projecting when the new owner can reasonably expect to recoup the costs associated with the acquisition of those shares. Here, the investor takes into consideration not only the purchase price paid for each share of stock, but also any broker fees or other charges that are related to the sale. Doing so makes it easier to determine how long to hold the shares before offering them for resale to other investors, based on both the anticipated performance of the shares and the cost price of holding those shares.
In all applications, the basic idea behind the cost price is to understand what it costs to buy and hold onto an asset for a given period of time. Calculating this in advance makes it much easier to have some idea of the type of returns that can reasonably be generated from the effort. Should the cost price be prohibitive in terms of the projected profits, there is a good chance that the buyer will decide to forgo the purchase and seek an opportunity that is more likely to produce the desired level of returns.
