What is the average price?

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. Here is how you can go about it.

In this case, the good news is that the weighted average price of Rs.328.70 is pretty close to the simple average price of Rs.329. That is more because you were mathematically lucky. The ideal method is always to use the weighted average price and use that to decide the level to exit.

Let us also look at the same transaction on the sell-side. You sell the above shares of Tata Motors as under; 600 shares at Rs.327, 200 shares at Rs.344, and 200 shares at Rs.347. Can you say that your average price is Rs.339.33 (327+344+347/3)? That means, the profit per share is Rs.10.63 (339.33 – 328.70), right? No, that is wrong. Let us again use the weighted average table to get the actual average price of selling.

The average selling price in the above case is Rs.334.40 and not Rs.339.33 as calculated earlier. You are still making a profit but not as much profit as you originally thought. That is why getting the right average price is important.

Tax calculators normally use the FIFO (First in First Out) method to work out profit or loss for tax purposes. But when it comes to deciding on buying and selling shares, your guide should be the weighted average price.

Trends in intraday trading

Intraday trading is based on chart trends and patterns and the assumption is that such patterns repeat over time. That is the crux of technical analysis. Charts and trends are the essences of intraday & online trading platform because they help you give movement signals with the price and conviction signals with volumes.

What is stop-loss?

Stop-loss is a protection for your intraday trading position. It is a level when you book a small loss and terminate your intraday position. For a buy transaction, the stop loss is set below the buy price and for a sell transaction, the stop loss is above the selling price.