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Volume-Weighted Average Price (VWAP)

The Volume-Weighted Average Price (VWAP) is a trading benchmark that calculates the average price of a security based on both price and volume throughout a specific time period. VWAP is used by traders to assess whether they are buying or selling at a favorable price compared to the average market price for the day. It helps minimize the market impact of large trades by providing a more balanced view of price action relative to trading volume.

Example

A trader buys shares of a stock at $50 per share, while the VWAP for the day is $48. This suggests the trader overpaid relative to the average price considering the volume of shares traded.

Key points

• A benchmark that calculates the average price of a security, weighted by trading volume.

• Used to evaluate whether trades are made at favorable prices compared to the average market price.

• Helps traders minimize market impact when executing large trades.

Quick Answers to Curious Questions

VWAP helps traders assess whether their trades are executed at a price better or worse than the average market price for the day, relative to trading volume.

It minimizes market impact by providing a balanced view of price movements based on volume, helping traders avoid moving the market with large orders.

It suggests that the trader paid more than the average price for the day, potentially indicating an unfavorable trade.