# What is Average Price?

Average price means the mean price of a financial asset over a period. The objective of calculating average price is to identify the simple arithmetic average over a defined period. When adjusting by trade volume, the volume-weighted average price came out, depending upon the intraday. There can be calculating the average of goods like a gallon of regular gasoline.

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## Understanding Average Price In Stock Market

If we consider average price in terms of basic mathematics, it is almost similar to a representative measure for a range of prices. The sum of the values is useful to calculate an average price. Then, it got divided by the number of prices. The range gets minimized into a single value through the average price. Afterwards, there will be a comparison of it with another point to understand whether it is a higher or lower value. If you find a range of prices, you can examine the average price. With this calculation, you will simplify a range of numbers into a single value.

## How to Calculate Average Price in Stock Market?

Now, you must have understood about the average price meaning. Let’s understand it in detail. Here is an example to understand the average price in share market in a better way,

Suppose, your earnings for a four-month period are $160, $200, $205, and $210 through your investments. Then, the calculation for the average return on your portfolio= ($160 + $200 + $205 + $210)/4 = 775 US$/4= 193.75.

To calculate the average price, you need to add its face value to the paid the price; then, you will have to divide the sum by two. Another use of average price is bringing out the yield to maturity (YTM) of a bond, where the average price will got replaced with the purchase price.

### Example of Average Price in Bonds: YTM

There is a lot of usage of the average price in the segment of bond prices. Calculating the yield to maturity (YTM) is a must for bondholders who want to understand the total rate of return from a bond until it touches its maturity period. You can use the bond’s average rate to maturity (ARTM) to know the YTM estimation. In ARTM, there is a need to measure the proportion of annual average return to the bond’s average price to identify the yield.

Here is the formula to calculate the average YTM for a coupon bond.

YTM= Cash flow + [(Face Value – Market Value)/ Years to Maturity] % ([Face Value + Market Value)/2]

Here is the formula to calculate the average YTM for a coupon bond.

Suppose an investor bought a corporate bond with a 5% annual coupon rate and a maturity period of six years at a par premium of $1,100. The face value of the coupon payments per year will be 5% x $1,000 face value of the corporate bond = $50.

Here is the following calculation of the Yield to Maturity (YTM).

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

Although calculating the Yield to maturity seems difficult, once you understand its formula and its logic, it will become easy. There will be the division of the premium amount over par (F – P = $1,000 – $1,100 = -$100) over the maturity period; this is the logic that this formula has. At the same time, the amount which is helpful to minimize the coupon payment annually is -$100/6 = -$16.67. No matter if the investor gets a $50 coupon annually, then $33.33 will be the annual average gain, as the buying price of the bond was above par.

To get the bondholder’s YTM, you will have to divide the average return by the average price. If the bond-buying is at a discount to par, then the annual average return will be more than the coupon payment. While, if there is the purchasing of the bond at par, then the annual average return will be the same as the coupon rate. Here, the YTM will also be the same as the coupon rate after the annual average return per year divided by the bond’s average price.

## Volume-Weighted Average Price

The volume-weighted average price (VWAP) is a trading benchmark that is helpful for traders. Depending on the price and volume, it helps to understand the average price of a security traded throughout the day. You can get meaningful information about the trend and the security value. Large institutional buyers and mutual funds mostly use the VWAP ratio. It is convenient for stocks to move into or out where the smallest market gets affected. The buying price can go below the VWAP while the selling price is above. In this way, the price can go back in the average direction.

There is a chance there is more use of VWAP as a trend confirmation tool by retail traders, almost the same as a moving average (MA).

At the time of the above VWAP price, you can switch to long positions, while at the below VWAP price, you can switch to short positions. The calculation of VWAP requires you to increase the dollar value for every transaction. Afterwards, there will be a division by the total shares.

VWAP=∑Volume∑Price * Volume

## Conclusion

For intraday averages, the volume-weighted average price (VWAP) is useful for those buyers and sellers who want to participate in the stock market to make lucrative profits. Technical traders can find moving averages (MAs) useful for various trend and reversal indicators. While calculating a bond’s average price, there is a need to consider face value and market price. It is also useful to bring its yield to maturity (YTM).

## Frequently Asked Questions (FAQs)

You can find the bonds listed on the stock exchanges based on real-time information. Thus, it also has average prices.

You can use the weighted average price (VWAP) method to determine the average price, where you can find the executed volumes weight the trade prices.

The factors such as the stock price, the bid spreads, and the volumes affect the average price in the stock market.

Median price means the middle price point of a data set. It is different from the average price. In contrast, the average price means a representative measure of a range of prices.