Average Stock Price: What is Average Share Price & How to Calculate

Average Price Introduction

We all have heard the concept of average in our school or in daily life. Suppose, if we buy 3 items for ₹30, ₹50 and ₹40 each, then the average price will be ₹40. In simple words, the average price is nothing but the total amount divided by the number of items. However, the concept of the average price formula in the stock market is not that simple. The stock price average formula rather uses the weighted average method.

What is the average share price?

As an investor, you always wish to pay less and earn more. But in the share market, you are not able to predict the accurate share price and the returns. Like everyone, you also end up buying the stock at its high and then keep waiting for the right time for an exit. Here, judicious averaging of price can help you. If you are considering a simple average for calculation of average price of a stock then you end up making a loss. 

Volatility and uncertainty in share prices are the regular features of the stock market. As a result, price fluctuation of securities is a normal thing and you also want to desire to buy a stock at a reasonable price, with a long-term perspective.

Appropriate average in stock market might be the answer to arrive at a rational price of a stock for better returns. Therefore, average pricing might be the best way to take the effective decision for long term buying and selling.

How to Calculate average share price?

The concept of the average pricing in the stock market is valid in buying as well as selling transactions. The concept of an average price of share is critical because you normally buy one company shares at different prices at different times. In reality, you must weigh these prices by the quantities purchased to get the right average price stocks. Here is an illustration where you buy ABC Ltd. 50 shares at the price of ₹120 each. The total spend is ₹6,000. The price of the stock falls to ₹100 next week after your initial purchase. You incur a loss of ₹20 per share. Now, you have two options. You can either wait for the stock's price to increase or invest ₹7,500 more to buy 75 shares.

If you does the latter, the calculation of average price stock is as follows:

• Total share price = ₹220  (₹120 + ₹100)
• Total number of transactions = 2
• Average stock price in the simple average method = ₹110
• Total invested amount = ₹13,500  (₹6,000 + ₹7,500)
• Total number of shares = 125  (50 + 75)
• Average stock price in the weighted average method = ₹108

There isn't a significant difference between the simple average and the weighted average in this example. But, when you trade in larger volumes with higher volatility in prices, use weighted average price to determine your total cost of purchase. The weighted average price per unit would then come down to ₹108. This way, your price of buying will come down to a much safer level from a long-term perspective.

Next, focus on the sell-side calculation of stock average price. Here is an illustration where you sell ABC Ltd. 50 shares at the price of ₹120 each. The total amount earned is ₹6,000. The price of the stock rises to ₹140 next week after your initial selling. Additionally, you incur a loss of ₹20 per share in the selling process. Now, you have two options. You can either wait for the stock's price to increase further or either sell more 75 shares of the same company to earn ₹10,500.

If you does the latter, the calculation of average price stock is as follows:

• Total share price = ₹260  (₹120 + ₹140)
• Total number of transactions = 2
• Average stock price in the simple average method = ₹130
• Total earned amount = ₹16,500  (₹6,000 + ₹10,500)
• Total number of shares = 125  (50 + 75)
• Average stock price in the weighted average method = ₹132

In the sell-side case also, there isn't a significant difference between the simple average and the weighted average share price. But, when you trade in larger volumes with higher volatility in prices, use weighted average price to determine your total earning. The weighted average price per unit would then rise to ₹132. This way, your price of selling will rise to a higher level.

How to use the average share price to your benefit?

Averaging is beneficial in both rising and falling markets. Averaging helps you accumulate more profits, if you buy stocks in rising markets. Similarly, in declining markets, it aids in lowering the average purchase price. In selling, it helps you to earn more average profits in case of rising markets. 

1. Averaging works best when a company's fundamentals are not that bad but its stock performance is influenced by industry-specific conditions or overall hurting market sentiments.
    
2. Sometimes the stock of a promising company is under pressure and prices begin to fall. To make averaging profitable, an investor should consider the quality of management, the balance sheet, valuation parameters and financial ratios of such companies.
    
3. When stock prices are rising, many investors prefer to do the averaging considering that now it is a good time to buy more stock. However, the average cost will rise further as a result of using this strategy. If the stock price continues to rise, this strategy will yield good profits when you sell these shares.

Factors that can impact the stock average price

There are four factors that will affect the averaging of a stock price. 

1. Fundamentals of a stock

Averaging works only for those stocks which have good fundamentals, belong to a market favorable sector and are much below their highest price level. Otherwise, for a fundamentally poor stock, it could add stress in becoming a liability with deepening losses as you end up buying or selling of these poor stocks.

      2. Volatility

Shares average may appear desirable when a fundamentally sound stock and its price is showing great fluctuations and becoming volatile. 

       3. Futuristic trend

Any stock that exhibits a futuristic trend towards growth for example, digitisation and Information Technology companies stocks are well-suited for price averaging.

        4. To correct the wrong in stock picking

This is the basic reason and need for averaging, i.e., to favorably minimize the price of your total holding in buy and sell-side. This implies that for a stock purchased at its highest price, which dipped fast in future averaging could be proved profitable.

Ways to lower your averaging price

These are three ways in which you could lower share avg price in total holdings.

1. Systematic investment plan (SIP)

This may be regarded as an automated mode of averaging price provided by the AMC. This implies buying your favorite stock in smaller lots regularly at every fall, paying in smaller amounts every month and thereby lowering your total average share price of holdings.

        2. Random averaging

You have two options if you have purchased a relatively larger lot of a stock and the market suddenly drops which leads to the fall in the price of your total holdings. One option is to sell the shares in order to stop the further loss and the second option might be to believe in the value of a stock to rise further, then use the averaging technique and buy more of that.

        3. Imprudent averaging

These could be the stocks that you purchased based on your instinct or emotions that means you end up buying a fundamentally weaker stock or a stock that was once a hit in the market but has now become a penny stock. Averaging in this scenario can be harmful because you end up buying more of a loss making stock and rather you should sell these shares immediately to minimize the loss.

Conclusion on Average Share Price

Knowing how to calculate average price of shares using the weighted average price method helps in determining how your investment is performing as a whole relative to the current share price. The share average pricing is a common strategy used in stock trading, wherein the investor scales up or scales down its total holdings depending on the share price and thereby minimizing the effects of market volatility.