Average prices are measures of price ranges that take into consideration the overall range and identify a median or average figure that serves as the benchmark for evaluating the performance of a security. The process requires identifying the values involved, adding them together, then dividing the sum by the number of prices or values that were included in the range. The average price can then be compared to the current market price of a security, making it possible to determine if the investment is currently performing above or below par. This same approach can also be helpful in the creation of budgets for an upcoming period, based on the averages of various expenses in previous periods.
When utilizing an average price as a budgetary tool, the process begins by identifying the expenditures associated with a specific line item that took place within a defined time frame. For example, if an individual is drafting a household budget for the upcoming year and wants to set the monthly budget for utilities, he or she would add the monthly utility totals together, arriving at a sum that defines the total cost of utilities for the year. In order to obtain the average price of utilities for that period, that annual total would be divided by twelve. The resulting average price could then be used to set the monthly budget for utilities during the upcoming year.
The same basic approach is used in calculating the average price connected with a bond issue. Here, the current face value of the bond is added to the actual price that the investor paid for the bond. That sum is divided by two in order to determine the geometric mean where the average price overtakes the purchase price as the bond moves closer to maturity. Calculating the average aids in the task of tracking the yield to maturity or YTM of the bond, although most investors will not rely on this approach alone to determine the YTM.
Investors can also use the average price model to identify the average annual movement of a stock option over the course of the last five to ten years. The ten-year average can be compared to the current actual market price as a rough estimation of whether the current value of the shares are below the average of the past ten years or performing above this benchmark. While determining the average price in this scenario should not be the determining factor in the decision to buy or sell the shares, the calculation does provide a rough idea of the stock’s performance over an extended period of time. This will allow the investor to get some idea of the stability of the security, which in turn may prompt the investor to investigate the option in more detail.
