What Does Average Trade Price Mean?

Here’s a rundown of when average trade price is used, how it’s calculated, and an example of how you can use it in your investing.

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The average trade price of a stock is the average cost of one share over a certain period of time or by a specific investor. As a basic example, if you buy one share of a particular stock for 100p and another for 200p, your average trade price is 150p.

Of course, real-world uses for average trade price aren’t usually that simple. So, here’s a rundown of when average trade price is used, how to calculate it, and an example of how you can use it in your own portfolio.

Applications of average trade price

There are two main scenarios where you’re likely to encounter the concept of average trade price.

Average price all investors have paid: What buyers have paid for a stock over a specific period of time, such as a day. This takes into account all of the trades made and averages them.

Average price you paid for a stock: You can use the same principle to determine the average price you paid for a stock, which can be helpful to know for several reasons, including tracking your overall investment performance or calculating how much capital gains tax you might have to pay if you sell.

There are other potential applications for average trade price, but these are the two main uses. In the next section, we’ll take a look at the math behind this.

How average trade price works

Average trade price is also known as the volume-weighted average price (VWAP), especially when referring to the average price paid by all traders in a specific period of time. However you want to use average trade price, the basic idea is the same. You take a weighted average of all of the trades in your data set.

A simple average involves taking a group of numbers, adding them together, and dividing by however many numbers there are. This is a relatively elementary concept in math.

A weighted average is used when different numbers have different weights assigned to them. Your grade point average (GPA) in college is a form of a weighted average; for example, a four-credit course carries more weight than a three-credit course.

Similarly, when calculating average trade price, you need to account for the number of shares purchased in each transaction. Think of it this way — if you buy 100 shares of stock at £10 and 25 shares at £20, you can’t simply take the average of £10 and £20 and say £15 is your average trade price. You bought most of your shares at the lower price, and that needs to be taken into account.

With that in mind, here’s a quick three-step formula for calculating a weighted average for average trade price:

  • Multiply each share price by the number of shares bought.
  • Add the results of the first step together.
  • Divide by the total number of shares bought.

An example of calculating average trade price

Obviously, if you’re trying to find the average trade price for a particular stock over a period of time, the calculation can be far too complex to do by hand. Many stocks trade millions of shares a day among thousands of investors, and their prices can be volatile. But for situations like determining your average cost basis in a stock, the calculation is fairly straightforward.

Consider the following situation. Let’s say that you own 300 shares of ABC Corp, but you didn’t buy them all at the same time. You accumulated the position by purchasing 100 shares at a time at three different points in your investing career. The prices you paid were:

  • 100 shares for 50p per share
  • 100 shares for 80p per share
  • 100 shares for 115p per share

You want to calculate the average trade price of your investment. So, you would use the weighted average formula in the previous section. First, you’d multiply each share count by the respective price paid, like so:

  • 100 shares x 50p = 5,000p
  • 100 shares x 80p = 8,000p
  • 100 shares x 115p = 11,500p

That’s step one. Step two is adding these three results together, which gives us 24,500p. Finally, dividing this amount by the total number of shares (300) gives an average trade price of 81.67p.

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.