Please ensure Javascript is enabled for purposes of website accessibility

How to Calculate an Average Percentage Difference Between 2 Dollar Amounts

By Motley Fool Staff – Mar 26, 2016 at 12:42AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Looking at how two different figures relate to each other over time can be helpful.

There are many situations in investing in which it makes sense to look at how two different numbers related to each other over time. Whether you're talking about two stocks in the same industry, the prices of two related commodities, or any other pair of numbers, calculating the average percentage difference over time can give you a benchmark against which to compare their recent behavior. Below, we'll go through the basics of how to calculate average percentage differences as well as providing some insight into how to interpret the results.

Calculating the average percentage difference
To come up with the average percentage difference over time, you'll need to build a time series of data. The starting point is the price information for each date on which you're producing an average.

First, calculate the difference between the two prices for each date. You'll need to pick one set of numbers to be the starting point on which the percentage difference will be calculated, and then subtract the other number from it. It's important to be consistent throughout the time series by subtracting the correct number from the other. It's possible that some differences will be positive while others will be negative.

Next, calculate the percentage difference for each date. To do so, divide the difference figure by that date's number from the set you chose as the starting point for the calculation. Again, these percentages can be positive or negative.

Finally, add up all of the percentage differences for the dates and divide by the number of dates you examined. The result is the average percentage difference for the series.

How to use the average percentage difference
The meaning of the average percentage difference depends on the nature of the two numbers involved in the calculation. For instance, if you're looking at a comparison between prices of Brent crude oil on the global market and prices of West Texas Intermediate crude on the U.S. market, the average percentage difference reveals how the two markets interact.

More generally, though, the average percentage difference is a useful indicator for examining future trends. If you know that the average percentage difference over long periods of time tends to stay constant, then future departures from that average can indicate temporary periods of irrational behavior. That can create investing opportunities for contrarians willing to wait for a reversion to the mean.

The math behind average percentage differences isn't complicated, but how you use the information can be. Over time, you can build expertise to help you interpret exactly what a given average percentage difference will mean in the markets you're analyzing.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now


Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.