Investors can track the average price of a stock over a specified time period as part of their investment strategy. The time weighted average price, or TWAP, shows the average price of a stock share as it moves up and down during that specified time period. The investor first finds the opening, closing, high and low prices for the stock on a specific day. He then averages those daily prices for each day he tracks the stock. The TWAP is found by taking the average of the individual daily averages.
TWAP Example and Uses
Suppose an investor wants to track the TWAP of a share of XYZ stock for 30 trading days. On the first day, shares of XYZ open at 30, close at 32, reach a high of 34 and a low of 28. The daily average for the first day is (30+32+34+28)/4, or 31. The investor repeats this process every day for 30 days, then averages the results to find the 30-day TWAP. The TWAP strategy is most useful when investors want to spread out trades evenly over a specified time period.