Average Price is a method used to determine the average price paid by an investor for a security that has been purchased at different times and prices such as through dollar cost averaging. An investor’s average price is determined by using the following formula:
Average Price = Total of purchase prices / The number of purchases
The desirable outcome for an investor who uses dollar cost averaging is that over time his average cost will be lower than the average selling price.
Ex:
month 1: $100 invested $20 share price 5 shares purchased
month 2: $100 invested $12.50 share price 8 shares purchased
month 3: $100 invested $10 share price 10 shares purchased
month 4: $100 invested $25 share price 4 shares purchased
total $400 invested $67.50 price 27 shares purchased
Average price =$67.50 / 4 =$16.75
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