Averages are used all the time in finance, usually to justify performance (above average'). However, as an investor, youshould realise there are several ways to calculate an average.The three most common are the mean, median and mode.
First, you can calculate the mean. Let's say you have five FTSE 100 readings on consecutive days. They are 4,800, 4,900, 4,700, 4,800 and 5,100. The mean is the sum of the readings (24,300) divided by the number of readings (five). So that's 4,860.
One of the problems is that extreme outliers (say one of the readings was 3,000 or 6,000) can give a misleadingly high or low figure. So you can "sense-check" this by calculating the median. This is the data point that sits in the middle when all the data are ranked in ascending order. Looking at our figures, that's 4,800. So in this case, using the median to test the mean shows that the two are close together, indicating that the mean can be taken as representative and has not been unduly distorted by outliers.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Finally, there's the mode the most common reading. In this example, that's also 4,800.
-
M&S and Tesco among those warning of a £7bn Budget hitSeventy-nine UK retailers have written to Chancellor Rachel Reeves about possible price rises and job cuts - here is what it means
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
