Volumized Average Price

My imperfect method, Volumized Average Price or VAP

(Volumized is not a real word)

When I set out to find a method of valuing the stocks that GMC owns when doing my weekly reporting, I knew I couldn’t just use the stock price at the time of writing the report. The price gap between bid/ask is sometimes as great as 200%. So rather than let the value of the fund swing wildly from week to week, a different method of determining share value had to be adopted.

At first I thought about using just the daily closing average over the last 30 days, but that method does not account for days when there are just 2 shares traded and when there are 100,000 shares traded.

So to give each closing price better representation, I had to factor in the volume of each day.

Thus, I came up with VAP.

The math:

Multiply across each day’s volume and closing price for the last X days
Find the sum of all those numbers

Then

Find the sum of volume for the last X days

Divide the first sum by the second sum

End result = VAP over the last X amount of days

The good


The number you have arrived at is close to what most people paid for their shares in the last X amount of days. This is what people have come to expect to pay for the stock and can be seen as the middle ground. When VAP is below the current stock price that means either the company is overvalued (due for a correction down in stock price) or the company is exceeding expectations (positive trend). When VAP is above the current stock price that means either the company is undervalued (due for a positive correction up in stock price) or performing negatively (negative trend). To determine if the company is Overvalued/Undervalued or performing Above/Below expectations is up to each investor or trader to decide. This method will help give a better view of the understood or implied value of a stock. The price swings from day to today only affect the price marginally.


The bad

The method has holes. If the closing price of a stock is vastly different than what the majority of the volume for the day was traded at, then it will lead to a miss representation of the price for that day and ultimately for the average. To counter this issue, it helps to add more days to the X amount of days. This is done so that under misrepresented and over misrepresented prices can counter each other and hopefully balance out over time. But when dealing with math you do not want to hope something works. If we had access to how many shares were sold at what price on every day. We could get a true VAP.

I am always looking for good and better ways of understanding and valuing investments, so please do not hesitate to contact me if you see flaws.

Sincerely

-Legolas Delgado