Average Balance

AAA

DEFINITION of 'Average Balance'

The balance on a loan or depositary account. A simple average balance is calculated by dividing the beginning balance plus the ending balance by two.

A weighted average balance will take into account how long the balance remained at specific levels during the measurement period, which is typically a month or a financial quarter long.

INVESTOPEDIA EXPLAINS 'Average Balance'

Average balance is more commonly used when referring to an average daily balance, particularly when charging interest on loans. Since banks are not permitted to charge interest on interest, any payments are applied first to interest payments due, and then to principal. 

For investors who trade on margin accounts, the average balance may be used to determine margin requirements or any margin calls that the brokerage makes.

RELATED TERMS
  1. Consumer Credit

    A debt that someone incurs for the purpose of purchasing a good ...
  2. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Interest-On-Interest

    The interest that is earned upon the re-investment of interest ...
  5. Account

    1. An arrangement by which an organization accepts a customer's ...
  6. Average Daily Balance Method

    A credit card accounting method where interest charges are based ...
Related Articles
  1. Active Trading Fundamentals

    Introduction to Margin Accounts

    Find out what your broker is doing with your securities when you invest on margin.
  2. Retirement

    Tired Of Banks? Try A Credit Union

    These nonprofit organizations can provide a range of services for lower fees.
  3. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  4. Options & Futures

    Demystification Of Bank Accounts

    Find out which type of account suits your specific needs.
  5. Trading Strategies

    What is a margin account?

    A margin account is an account offered by brokerages that allows investors to borrow money to buy securities. An investor might put down 50% of the value of a purchase and borrow the rest from ...
  6. Investing Basics

    What is the effect of price inelasticity on demand?

    Find out why price inelasticity of demand shows the relationship between demand and price if the price of an inelastic good is either lowered or raised.
  7. Fundamental Analysis

    How do I calculate the debt-to-equity ratio in Excel?

    Understand the basics of the debt to equity ratio, how it is interpreted as a measure of financial stability and how it is calculated in Microsoft Excel.
  8. Investing

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  9. Brokers

    Arbitrage Opportunities in Spread Betting

    While the opportunities are few and far between, investors may use arbitrage to take advantage of price differences in financial spread betting.
  10. Brokers

    The Exciting World Of The Top Spread Betting Brokers

    Spread betting can be fun, but it's risky and you will want a reliable broker. Here are the top spread betting brokers.

You May Also Like

Hot Definitions
  1. Multiplier Effect

    The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends ...
  2. Command Economy

    A system where the government, rather than the free market, determines what goods should be produced, how much should be ...
  3. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  4. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  5. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  6. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
Trading Center