VWAP stands for volume-weighted average price, a trading benchmark that is often used by passive investors. It reflects the ratio of an asset's price to its total trade volume.
To calculate VWAP, you use the following equation:
VWAP = ∑(amount of asset bought x asset price)/total equities bought that day
Traders use VWAP to ensure that all trades match the volume of trades being made in the market. This ensures high liquidity, which usually leads to lower transaction costs.
VWAP is particularly useful when trading large numbers of equities. Attempting to buy a large volume of a single stock on the market would typically artificially increase its price — by using VWAP, traders can ensure that they aren't overinflating the trading volume for the asset they want to buy.