# What is the Average Buying Price of a stock?

*Average Buying Price* of a stock is “the total amount invested in the stock” divided by “the total number of shares purchased of the stock”.

## Average Buying Price using Arithmetic mean

One way of calculating Average Buying Price is using the *arithmetic mean*. In a sense, Average Buying Price is the arithmetic mean of **individual share’s price** that you have bought over time.

### Example 1

Say you have bought three shares of a company at prices:

You can say that you paid

2 for each of the three shares.

### Example 2

Say you have bought five shares: three shares for

You have purchased five shares for

2.8 each.

## Average Buying Price using Weighted Average

In practice, it is not easy to add up individual share prices. It can be simplified using a mathematical formulation called *Weighted Average*, which takes purchased quantity and the price (for which many shares are collected).

- p1 is the price at share unit
- q1 is the number of shares bought at price p1
*so on*

In a grand sense, you reach back to the invested amount of a transaction by multiplying purchased units with unit price. Weighted Average helps you calculate the average price over multiple transactions.

### In practice

Let’s understand Weighted Average formulation with an example:

Say you have bought five shares: three shares for

## Significance of Average Buying Price

Average Buying Price acts as a reference for calculating your *profit & loss*. Selling or purchasing some shares requires calculating the new Average Price. Understanding how the new price is calculated helps in making well-informed decisions.

Extending example 2, let’s say you buy five additional shares for

You don’t need to add the individual share price to your calculation; instead, you can use the previously calculated average price, i.e.,

You don’t need to remember or apply the formula on your own; We have created a tool for you for such calculation.

## Summary

In simple understanding, Average Buying price is the total amount invested divided by the total number of shares purchased. It acts as a reference price for communication and calculating profit & loss.

In real life, you don’t buy shares in a single transaction; you might need to estimate the “future buying average” before you invest more in the stock. So, understanding how average buying calculation works can save you from blunders.

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