Average Cost Basis
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It adds up the total amount paid across all purchases of a security, including reinvested dividends if applicable, and divides that by the total number of shares acquired, giving a single blended cost per share.

It determines your taxable capital gain or loss, since gain or loss is calculated as the sale price minus your cost basis — using an inaccurate basis can lead to overpaying or underpaying capital gains tax.

Each purchase blends into the running average weighted by the number of shares bought at that price, so a large purchase at a very different price will shift the average basis more than a small one.

No, some brokerages default to first-in-first-out or allow specific share identification instead of average cost, and the method used, particularly for mutual funds versus individual stocks, can significantly change your reported gain or loss.

Each reinvested dividend counts as a new purchase at that day's share price, adding both to the total shares owned and the total amount invested, which continually recalculates the blended average cost basis going forward.