What is Weighted Average Price (WAP) ?

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The Weighted Average Price (WAP) is a method used by investors to calculate the average cost of shares when they are purchased at different prices over time. Unlike the FIFO (First In, First Out) method, which only considers open positions for cost calculation, WAP accounts for all trades, including purchases and sales, to maintain an accurate cost basis for the remaining position.

Steps to Calculate Weighted Average Price:

1. Calculate Total Cost for Each Purchase:
   Multiply the number of shares acquired at each price by that price to determine the total cost for each transaction.
2. Calculate Cumulative Purchase Cost:
   Add the total costs from all transactions to find the total cost of all shares purchased.
3. Determine Weighted Average Price:
   Divide the cumulative purchase cost by the total number of shares acquired to get the weighted average price per share.
4. Adjust for Sales and Realized Profit:
   When shares are sold, the corresponding portion of the purchase cost is deducted. If there is a profit from the sale, it is adjusted to reduce the cost basis of the remaining shares, recalculating the weighted average price.

For Example, Mr. Sharma, an investor, builds a position in a stock named XYZ over multiple years. In the first year, he buys 100 shares of XYZ at Rs. 10 each, resulting in a total cost of Rs. 1,000. In the second year, he purchases an additional 50 shares at Rs. 40 each, adding Rs. 2,000 to his total cost. By the end of the second year, Mr. Sharma’s cumulative cost for 150 shares is Rs. 3,000, making the weighted average price Rs. 20 per share (Rs.3,000÷150Rs. 3,000 \div 150Rs.3,000÷150). In the third year, he sells 50 shares of XYZ at Rs. 25 each, generating Rs. 1,250 from the sale. The cost of the shares sold, calculated at the weighted average price of Rs. 20 per share, is Rs. 1,000, resulting in a realized profit of Rs. 250. This profit is adjusted against the remaining cost, reducing it to Rs. 1,750 for the remaining 100 shares. Consequently, the new weighted average price becomes Rs. 17.50 per share (Rs.1,750÷100Rs. 1,750 \div 100Rs.1,750÷100)

Who will benefit ?

* Weighted average price provides an accurate cost basis for all trades, including purchases and sales.

* Profit from sales is adjusted to reduce the cost of the remaining shares, ensuring a dynamic recalculation of the WAP.

* This method is especially used for investors like Mr. Sharma, who build positions over time and make partial sales.

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