The volume weighted average price is concerned with the total volume traded within a given time frame, such as a single trading day. The purpose of the VWAP is to determine the ratio of value associated with all the trading that was conducted during the cited period. This is achieved by comparing the value traded during the period to the total volume traded for the same time frame.
For investors that tend to be more reactive than proactive in their investing approach, the volume weighted average price can serve as an important benchmark. The formula can be applied to a wide range of securities, or focus in on one security in particular. By doing so, it is possible to make sure that any security trading conducted by the investor remains in line with the overall volume level of the market. As a means of minimizing the chances for volatility in the investment process, the use of a volume weighted average price calculation is generally quite effective.
Utilizing the volume weighted average price also works well when the purpose of the investment is to provide some type of future nest egg, such as with a pension plan. Because the calculation of a volume weighted average price can help identify investment opportunities that are performing well and appear to be carrying a lower amount of risk, the strategy is ideal for conservative investors. While the returns may not be spectacular as far as daily gains, the steady accrual of value will help to provide a great deal of stability to the pension plan.
While the formula for calculating a volume weighted average price is sometimes applied to periods of less than a day, many analysts tend to consider this application of no real value. In order to establish a true benchmark, it is necessary to take into consideration the total activity between the opening and closing of a market day. However, the method of calculating a volume weighted average price will function well if applied to longer periods, such as two consecutive trading days, or a solid week of trading.
