Average Traded Price: Meaning, Examples, and How to Calculate

Last Updated: 4 Feb 2025

The concept of average is quite clear. If we buy 3 items at Rs.40, Rs.50, and Rs.60 each then the average price is Rs.50. In other words, the average price is nothing but the total value divided by the number of items. However, the concept of the average price in the stock market can be a tad more complicated.

For example, to understand the concept of the average price in the share market, you need to understand the basic difference between simple average and weighted average. When it comes to the average price in the stock market, it is the weighted average and not the simple average price that matters. You must also know that if you consider the simple average for the average price in the share market, you may end up making a loss instead of a profit.

What is the average price in the stock market?

The concept of the average price in the stock market is valid in buying transactions and also in sell transactions. Let us first focus on the buy-side to understand what is the average price in the stock market for buy transactions?

The concept of an average price is critical because you normally place buy orders in the market and the market mechanism executes the order at different quantities and different prices within your conditions. Here is an illustration where you buy 1,000 shares of Tata Motors and your maximum acceptable price is Rs.335. Your broker informs you that he bought 300 shares of Tata Motors at Rs.325, 475 shares at Rs.329, and 225 shares at Rs.333.

Can you say that your average price is Rs.329 (325+329+333/3)? Not exactly! In reality, you must weigh these prices by the quantities purchased to get the right average price.

How Average Price is Calculated?

Calculating the average price of stocks involves taking the total cost of all purchased shares and dividing it by the total number of shares owned. This method provides an accurate reflection of the cost basis of the investment. The average traded price is determined by summing up the prices of all trades and then dividing by the total number of trades. Understanding what is average traded price in stock market requires knowing that this calculation incorporates all executed transactions, offering a realistic view of the trading activity. For instance, if an investor buys shares at different prices over time, the average price helps in identifying the overall cost per share. The average traded price is particularly useful for analyzing the cost efficiency of trading strategies. By consistently calculating the average price and the average traded price, investors can make informed decisions and optimize their investment performance, ensuring a balanced and well-evaluated portfolio.

Role of FIFO in determining average traded price

FIFO (First-In, First-Out) is a method used to determine the average traded price of stocks. It assumes that the earliest purchased stocks are sold first. This method is crucial in calculating the average price as it reflects the actual sequence of transactions. When applying FIFO, the average traded price is computed by considering the cost of the oldest stocks first, thus aligning closely with the historical purchase prices. Understanding what is average traded price in stock market involves knowing that FIFO impacts the pricing by using the initial purchase costs, which may be lower or higher than the current market price. This method provides a realistic view of the profit or loss from stock trades, making it a reliable approach for investors to determine the average price over time. FIFO’s role in the average traded price calculation helps investors make informed decisions based on the chronological order of their stock transactions.

Examples of Using FIFO to Calculate the Average Traded Price (350-400 words Use keywords 8 times)

Understanding how FIFO (First-In, First-Out) impacts the average traded price is crucial for investors. Let’s look at some examples to illustrate this concept.

1. Example : An investor buys 100 shares of Company A at ₹100 per share, 50 shares at ₹120, and 200 shares at ₹110. Using FIFO, the first 100 shares purchased at ₹100 are sold first. If the investor decides to sell 150 shares, the calculation of the average traded price involves the first 100 shares at ₹100 and the next 50 shares at ₹120. Therefore, the average traded price would be:

Average Traded Price = (100 x ₹100)+(50 x ₹120)/150 = ₹106.67

This example shows how the average traded price reflects actual historical purchase costs.

2. Example : An investor purchases 300 shares of Company B at ₹50 per share, 200 shares at ₹60, and 100 shares at ₹55. If the investor sells 250 shares, FIFO dictates that the first 300 shares purchased at ₹50 are sold first. Thus, the average traded price is calculated based on the initial 250 shares at ₹50:

Average Traded Price = 250 x ₹50/250 = ₹50

This calculation demonstrates how FIFO ensures the average traded price accurately reflects the initial purchase costs.

3. Example : An investor buys 400 shares of Company C at ₹80 per share, 150 shares at ₹90, and 250 shares at ₹85. If the investor decides to sell 350 shares, FIFO means the first 400 shares at ₹80 are used first. The average traded price calculation considers the initial 350 shares at ₹80:

Average Traded Price = 350 x ₹80/350 = ₹80
In this scenario, the average traded price accurately represents the chronological order of purchases.

By understanding what is average traded price in stock market, investors can see how FIFO affects the pricing by using the initial purchase costs. The average traded price reflects the cost basis of the sold shares, providing a realistic view of the profit or loss from stock trades. These examples highlight the importance of FIFO in determining the average traded price, ensuring that the investment strategy is based on accurate and historical purchase prices.

Investors can better manage their portfolios and make informed decisions about buying and selling stocks, improving their investment performance. This comprehensive understanding of FIFO’s role in calculating the average traded price helps investors align their strategies with their financial goals.

Conclusion

In conclusion, understanding FIFO’s role in determining the average traded price is essential for accurate stock trading analysis. By using the First-In, First-Out method, investors can ensure that the average traded price reflects the historical purchase costs, offering a realistic view of profits and losses. This method provides clarity on the investment strategy, helping investors make informed decisions.

Incorporating FIFO into the calculation of the average traded price allows for a consistent and transparent approach to managing and evaluating stock portfolios. Understanding what is average traded price in stock market further emphasizes the importance of accurate and methodical trading practices.

Frequently Asked Questions

Q1.Can bonds have an average price?

Like equities, bonds are also listed and traded on the stock exchanges on a real time basis so they also have average prices. The logic is again of using weighted average price.

Q2.How to calculate the average price?

Average price is calculated using the weighted average pricing method where the trade prices are weighted by the volumes executed.

Q3.Factors affecting the average price?

Apart from the stock price, the volumes and the bid/ask spreads also impact the average price.