When you take the average of a number of transactions without weighting them, a transaction for 10 units would have the same effect on the average as a transaction for 1,000 units. To fix this problem, the volume-weighted average price takes into consideration the number of units involved in each transaction. This is particularly useful for measuring the average price of a stock for a day. If you just used the closing price, a last-second, small-volume trade could drastically bring down or raise the price to a point that does not reflect the actual value of the stock.

Multiply the price of each transaction by the volume of the transaction -- for this example, a stock traded three times during the specified time period. If the three transactions were 100 shares for $56, 400 shares for $58 and 200 shares for $55, multiply 100 by $56, 400 by $58 and 200 by $55 to get $5,600, $23,200 and $11,000.

Add the products of the price times the transaction to find the total value of the transactions. In this example, add $5,600 plus $23,200 plus $11,000 to get $39,800.

Add the number of units in each trade to find the total number of units traded. In this example, add 100 plus 400 plus 200 to find that 700 units were traded.

Divide the total value of the transactions by the total number of units to find the volume-weighted average price. In this example, divide $39,800 by 700 to find the volume-weighted average price equals $56.86.

References

Writer Bio

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."