Definition and Example of Volume Weighted Average Price (VWAP)
Volume Weighted Average Price (VWAP) is one of the methods of tracking the price of securities. It considers the number of shares traded at specific prices. Investors continuously monitor the price of stocks and other securities they trade. Many stock exchanges report the security price as the price at which the last transaction occurred, but there are other ways to track the security price.
How Volume Weighted Average Price Works
Volume Weighted Average Price works by allowing investors to know the average price at which stocks or other securities have been traded throughout the trading day. Imagine that during a single trading day, five shares of XYZ were traded. In the morning, two shares were traded at $10 each. At the beginning of the afternoon, two shares were traded at $7 each, and just before the market closed, one share was traded at $12. This process would result in most quotes for XYZ at $12 since that is the price at which the last transaction occurred. However, the volume weighted average price for that day would be $9.20, as it was the average price paid per share that day.
Advantages and Disadvantages of Volume Weighted Average Price
Advantages:
– Good for analyzing large stock transaction prices.
– Reduces short-term price volatility.
Disadvantages:
– Difficult to calculate due to the large amount of data.
– Limited use outside of large investments and technical analysis.
What This Means for Individual Investors
Most investors will not need to worry about volume weighted average price because their portfolios are too small to make it a good tool for analyzing the value of their stock positions. If you are conducting technical analysis in your investment strategy, you may want to use volume weighted average price to try to identify trends. Otherwise, most individual investors can safely ignore it.
Source: https://www.thebalancemoney.com/what-is-volume-weighted-average-pricing-5213049
Leave a Reply