Average price is the mean price of an asset or security observed over some period of time. It is calculated by finding the simple arithmetic average of closing prices over a specified time period. When adjusted by trading volume, the volume-weighted average price (VWAP) can be derived on an intraday basis.

The average price of a good, such as a gallon of regular⛄ gasoline, may also be computed by surveying vendors or producers over a specific period 🔯of time.

While often related, average price should not be confused with 澳洲幸运5官方开奖结果体彩网:average return.

Understanding Average Prices

In basic mathematics, average price is a representative measure of a range of prices. It is calculated by taking the sum of the values and dividing it by the number of prices being exa𒊎mined. The average price reduces the range into a single value, which can then be compared to any other point to determine if the value is higher or lower than what would be exꦇpected.

In situations where there is a range of prices, it can be useful to calculate the average price to simplify a range of numbers into a single value. For example, if, over a four-month period, you earn $104, $105, $110, and $115 from your investments, the 澳洲幸运5官方开奖结果体彩网:average return on your portfolio will be ($104 🐻+ $105 + $110 + $115) / 4 =🦂 $108.50.

The average price of a bond is calculated by adding its 澳洲幸运5官方开奖结果体彩网:face value to the price pai🐈d for it and dividing the sum by two. The average price is sometimes used in determining a bond's🐬 yield to maturity (YTM), where the average price replaces the purchase price in the YTM calculation.

Example of Average Price in Bonds: YTM

In the finance sector, average price is mostly used in the context of bond prices. Bondholders that are interested in knowing the total 澳洲幸运5官方开奖结果体彩网:rate of return from a bond that is held until maturity can calculate a metric known as the 澳洲幸运5官方开奖结果体彩网:yield to maturity (YTM). An estimate of the YTM can be calculated using the bond’s average rate to maturity (ARTM). The ARTM determines the yield by measuring the proportion of the av𝓡erage return per year to the average price of the bond.

For a 澳洲幸运5官方开奖结果体彩网:coupon bond, the average YTM can be calculated as follows:

For example, consider an investor that purchased a corporate bond with an annual coupon rate of 5% and six years to maturity at a 澳洲幸运5官方开奖结果体彩网:premium to par for $1,100. Annua𒅌l coupon payments, or cash flows received, will thus be 5% x $1,000 face value of the corporate bond = $50. Its YTM can be calculated as fo🉐llows:

• $50 + [($1,000 - $1,100) / 6] ÷ ($1,000 + $1,100) / 2
• $33.33 / $1,050 = 3.17%

The logic behind the formula is that the premium amount over par (F – P = $1,000 - $1,100 = -$100) is divided over the number of years to maturity. Hence, -$100/6 = -$16.67 is the amount that reduces the coupon payment per year.

So even though the investor receives a $50 coupon per year, their real or average return is $33.33 per year ($50 - $16.67 = $33.33) because the bond was bought for a price 澳洲幸运5官方开奖结果体彩网:above par. Dividing the average return by the median or average price is the bondholder’s YTM.

Note that, if the bond was purchased at a discount to par, the investor’s average return per year will be higher than the coupon payment. Furthermore, if an investor bought the bond at par, the average return per year 𝓰will equal the coupon rate. In this case, the YTM will also equal the coupon rate after dividing the average return per year by the average price of the bond.

Volume-Weighted Average Price (VWAP)

The volume-weighted average price (VWAP) is a trading 澳洲幸运5官方开奖结果体彩网:benchmark used by traders that reveals the average price a security has traded at throughout the day, based on both volume and price. It is important because 澳洲幸运5官方开奖结果体彩网:it provides traders with insight into both the trend and value of a security.

Large institutional buyers and 澳洲幸运5官方开奖结果体彩网:mutual funds use𒊎 the VWAP ratio to help move into or out of stocks with the smallest market impact. Therefore, when possible, institutions will try to buy below the VWAP, or sell above it. This way their actions push the price baওck toward the average, instead of away from it.

Retail traders tend to use VWAP more as a trend confirmation tool, similar to a 澳洲幸运5官方开奖结果体彩网:moving average (MA). When the price is above VWAP, they look only to initiate long positions. When the price is below VWAP, they only look to initiate 澳洲幸运5官方开奖结果体彩网:short positions.

VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by the nܫumber of shares traded) and then dividing by the total shares traded.

$\text{VWAP}=\frac{\sum\text{Price * Volume}}{\sum\text{Volume}}$VWAP=∑Volume∑Price * Volume​

How Do You Calculate Average Stock Price?

Since the purchase price of common stock typically changes every day due to market forces, common stock purchased at different points in time will cost different amounts of money. To calculate the average cost, divide the total purchase amount by the number of shares purchased to fi🗹gure the average cost per share.

What Is a Simple Moving Average?

A simple moving average (SMA) calculates the average of a se꧋lected range of prices, usually the closing prices of a security, by the number of periods in that range.

What Does Average Unit Price Mean?

Average unit price is ꦬthe average price an item is sold for in a specific time period. Average unit price is calculated by dividing the total revenue or net sales amount by the number of items sold.

What Is Average Traded Price?

Average traded p꧅rice is what buyers have paid for one share on average, over the course of a specific time period. Average🅺 traded price is also referred to as volume-weighted average price.

The Bottom Line

The average price is the mean price of an asset or security over a certain period of time. It is calculated by taking the sum of the va𝕴lues and then dividing that total by the number of prices being examined.