VWAP is the average price of a security over a period, weighted by how much stock traded at each price. It answers what the market actually paid, not where the price happened to finish. The prices at which large volume traded dominate the number; a small trade barely moves it.
What VWAP is
Take every trade in the period. Multiply each trade's price by its volume, add those products together, and divide by the total volume traded. That is the whole calculation.
The weighting is the point. Suppose a stock trades three times in a day:
- 10,000 shares at $1.00
- 30,000 shares at $1.10
- 10,000 shares at $1.00
The value traded, price times volume for each trade, is $10,000 + $33,000 + $10,000 = $53,000. The volume traded is 50,000 shares. VWAP is $53,000 divided by 50,000, or $1.06.
The simple average of the three prices is $1.033. The gap opens because most of the day's volume went through at $1.10. VWAP counts that; a simple average of prices treats the 10,000-share trade and the 30,000-share trade as equals. A real trading day has thousands of trades rather than three, but nothing about the arithmetic changes.
What VWAP is not
VWAP is not the closing price. A close is a single trade at a single moment. VWAP is the whole period.
It is not the midpoint of the high and the low. That measure ignores volume entirely and can be dragged around by a single odd trade at either extreme.
It is not the average of daily closing prices over a run of days. A five-day VWAP weights each day by the value traded that day, so a heavy day counts for more than a quiet one, while an average of five closes gives every day equal say. The two numbers rarely match, and they diverge most when volume is lumpy, which is exactly when the number tends to matter.
Nor is there one canonical VWAP for a security, unless a rule fixes the basis. Left to itself, the figure depends on the window (which days, and which hours within them), on which venues' trading is counted, and on which trade types are stripped out first. Change any of those inputs and the answer changes. Two people quoting a VWAP for the same stock over the same dates can both be arithmetically correct and still disagree, so a VWAP without its basis stated is not a usable number.
Why it matters on the ASX
In Australia, VWAP is more than a market convention: it is a defined term with money attached. The ASX Listing Rules define it under the name "volume weighted average market price" rather than the shorthand everyone actually uses, and they specify which trade types are left out of the calculation (ASX Listing Rule 19.12). That definition is the one other Listing Rules refer back to. Where a rule works off a VWAP, the calculated figure is the price itself, not a benchmark to be measured against, so a wrong window or a missed exclusion moves a real number in a live transaction. The error is usually only visible to someone who redoes the calculation. Why and when VWAP is used sets out the specific rules and corporate actions that turn on it.