# 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".

$\text{Buying Average Price}=\frac{\text{amount invested in the stock}}{\text{total number of shares purchased}}$

## 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: $1, $2, and $3, then Average Buying Price would be: $\frac{1+2+3}{3}=2$ You can say that you paid $2 for each of the three shares.

### Example 2

Say you have bought five shares: three shares for $2 and the rest for $4, then Average Buying Price would be:

$\frac{2+2+2+4+4}{5}=2.8$

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 $2 and the rest for $4, then Buying Average Price would be: $\frac{2\left({p}_{1}\right)×3\left({q}_{1}\right)+4\left({p}_{2}\right)×2\left({q}_{2}\right)}{5}=2.8$ ## 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. Let's understand it with an example: Extending example 2, let's say you buy five additional shares for $3; you need to recalculate the average price:

$\frac{2×3+4×2+3×5}{10}=2.9$

You don't need to add the individual share price to your calculation; instead, you can use the previously calculated average price, i.e., \$2.8

$\frac{2.8×5+3×5}{10}=2.9$

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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