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. Account

    1. An arrangement by which an organization accepts a customer's ...
  2. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  3. Consumer Credit

    A debt that someone incurs for the purpose of purchasing a good ...
  4. Average Daily Balance Method

    A credit card accounting method where interest charges are based ...
  5. Interest Rate

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

    The interest that is earned upon the re-investment of interest ...
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. Active Trading Fundamentals

    What is liquidity risk?

    Learn how to distinguish between the two broad types of financial liquidity risk: funding liquidity risk and market liquidity risk.
  7. Active Trading Fundamentals

    What does the gearing ratio say about risk?

    Find out why lenders and investors pay close attention to a firm's gearing ratios, and why both too much and too little borrowing can be risky.
  8. Investing on margin can be profitable but it's a risky play that needs care.
    Trading Strategies

    Margin Investing: Big Risk, Big Reward

    Investing on margin can be profitable but it's a risky play that needs care.
  9. Mutual Funds & ETFs

    How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading strategies.
  10. Fundamental Analysis

    Which leverage ratios are most useful for analyzing manufacturing companies?

    See which leverage ratios investors and creditors are likely to use when analyzing the debt burdens for manufacturing companies.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center