VWAP discount
Also called: discount to VWAP, VWAP pricing, purchase price discount
The percentage below a volume-weighted average price at which an investor buys or converts into shares under a financing agreement, such as 97% of VWAP or 80% of the lowest VWAP.
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What VWAP is
The volume-weighted average price (VWAP) for a day is the total dollar value traded divided by the total shares traded. It weights each trade by its size, so it reflects where most of the day's volume actually changed hands better than the closing price does.
How the discount works
Financing agreements often set the price an investor pays as a percentage of VWAP. An equity line might price purchases at 97% of the daily VWAP; a variable-price conversion might use 80% of the lowest daily VWAP over the prior ten days. The discount is the investor's built-in margin, alongside any fees or commitment shares.
Two details change the economics a lot:
- Which VWAP. "The VWAP on the purchase date" and "the lowest VWAP over a lookback period" can give very different prices in a volatile stock.
- How deep the discount is. A 3% discount and a 30% discount are different deals even if the rest of the wording is identical.
Worked example
Hypothetical: Company X's daily VWAPs over five days were $2.10, $1.95, $2.05, $1.80 and $2.00.
| Formula | Price |
|---|---|
| 97% of the last day's VWAP | $1.94 |
| 90% of the average VWAP ($1.98) | $1.78 |
| 80% of the lowest VWAP ($1.80) | $1.44 |
All figures are hypothetical.
How to spot it
Search the agreement exhibit (filed with an 8-K or registration statement) for "Purchase Price", "Conversion Price" and "VWAP". The defined term "VWAP" itself usually names the data source used, such as a specific market data vendor. See Equity lines (ELOCs).
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