Average Price in Stocks: What It Means & How to Calculate

What Is Price Averaging

Price averaging refers to the average price calculated based on the number of lots you hold. Have you ever wondered why it happens and how it works in investing on Bursa Malaysia?

It naturally occurs when you buy the same counter but at different prices.

It can happen whether you buy on the same day or on different days.

However, we must note that the price averaging technique carries very high risk.

This is because those who refuse to cut loss will use the price averaging technique as they believe the stock price will eventually rise.

Therefore, price averaging is only suitable for stocks where the company''s fundamental analysis is strong.

If a stock is purely speculative, then it is extremely risky.

Calculation Example

•15 April 2020, buy 100 units of stock X at RM2.01

•2 July 2020, buy 100 units of stock X at RM2.79

Average price = [(First purchase price x units of first purchase) + (Subsequent purchase price x units of subsequent purchase)] / (units of first purchase + units of subsequent purchase)

•Average price = [(2.01 x 100) + (2.79 x 100)] / (100 + 100)

•Average price = RM 2.40

Referring to the diagram above, the blue line represents the average price for the two red lines.

When Stock Price Rises

Average up to maximise profits. Typically, you would top up with fewer lots than the original purchase amount.

Why top up with fewer lots?

Because when a stock price has already risen, the risk becomes higher.

So what we need to do is top up with fewer lots than the original purchase amount.

Example

First entry: buy 100 units. Second entry: only 50 units.

•EP 1: 100 units of stock Y at RM 1.00

•EP 2: 50 units of stock Y at RM 1.50

•Average Price: (RM1 x 100) + (RM1.50 x 50) / (100 + 50)

= RM 1.17

When Stock Price Falls

Average down to make it easier to breakeven (the point where there is no loss and only minimal profit gained by a trader) if the price drops and, based on your analysis, you believe the stock''s true value is higher.

So what we need to do is top up with more lots than the original purchase amount.

However, this strategy is extremely risky.

Make sure when averaging down, you choose quality counters — not penny stocks or counters with poor fundamental analysis.

Example

•EP 1: 100 units of stock Z at RM 1.00

•EP 2: 200 units of stock Z at RM 0.80

•Average Price: (RM1 x 100) + (RM0.80 x 200) / (100 + 200)

= RM 0.87

Intraday Price Averaging

The difference between price averaging and excluding the averaging price

Situation 1: Buy 2 times, sell 2 times.

•9am — Buy stock A at RM 0.50, 100 lots
•10am — Sell stock A at RM 0.51, 100 lots
•11am — Buy stock A at RM 0.55, 100 lots
•4pm — Sell stock A at RM 0.60, 100 lots

Please take note that

1 lot = 100 units

Situation 2: Buy 3 times, sell 2 times

•9.30 am — Buy stock A at RM 0.50, 100 lots
•10 am — Sell stock A at RM 0.51, 100 lots
•3 pm — Buy stock A at RM 0.52, 100 lots
•4 pm — Sell stock A at RM 0.53, 100 lots
•4.45 pm — Buy stock A at RM 0.55, 100 lots and hold until the next day

Do you understand how the unrealised profit of RM300 was calculated?

Here is how it works: the latest stock price (last purchase) is 55 sen and the average buy price is 52 sen.

The last purchase was 100 lots.

Unrealised profit = (55 sen - 52 sen) x 10,000 units = RM 300.

Hope you understand. If anything is unclear, feel free to leave a comment below.

Frequently Asked Questions (FAQ)

What is average price in stock investing?

Average price is the overall price calculated based on the number of lots and different purchase prices. When you buy the same stock at different prices multiple times, the broker system will automatically calculate the overall average price of your holdings.

How do you calculate the average price of stocks?

Average price is calculated by adding up all purchase values and dividing by the total number of stock units held. For example, if you buy 100 lots at RM0.50 and another 100 lots at RM0.52, your average price is RM0.51 because the total cost is divided by the total number of units.

What is the difference between average down and average up?

Average down occurs when you buy additional shares at a lower price than the original purchase, causing the average price to decrease. Average up occurs when you buy at a higher price, increasing the average price. Both strategies have their own risks and advantages depending on the analysis of the stock.

How is unrealised profit or loss calculated based on average price?

Unrealised profit or loss is calculated by subtracting the average price from the current stock price, then multiplying by the number of units held. If the current price is higher than the average price, you have an unrealised profit. Conversely, if it is lower, it is an unrealised loss.

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