Investment Strategy – Averaging Down Stocks
They say that when it comes to the stock market, you should “buy low and sell high.” But if you pay a high price for a stock to begin with, using an investment strategy like averaging down can improve your chances of selling at a profit in the future.
Remember in July 2019 when Barita’s stock price hit almost $100 and people ran to buy the stock? But then the share price slowly dipped back to $50 in July of this year. Well, if you held on to your shares at the $100 high and bought more shares at the low, then you would’ve been rewarded in October when the stock returned to the $100 range.
That’s a real world example of averaging down. Buying more shares as the price begins to fall in anticipation of a rebound. When you decide to average down, you’re essentially lowering the average cost of buying the stock.
In another example, let’s say you bought 100 units of Scotia stock at $55 per share and the price dropped to $35 following the onset of the pandemic in March. Time to start panicking right? Maybe not!
If you then bought 100 more shares at $35 per share, you would’ve spent $3500 for that lot.
As the name suggests, this investment strategy is averaging. So let’s go back to some Grade 6 Math.
If your first buy cost you $5500, and your second buy was at $3500, when you add them, you get $9000. Next step is to divide that amount by the 200 shares you now own, and you will get $45. So, total purchase price divided by total units.
What this simply means is that your average cost per share drops to $45, down from the original $55. Averaging down.
By purchasing two separate lots at $55 and $35, you would’ve made a slim profit as Scotia traded above $45 at the end of October. Even if the stock never makes it back to your original purchase price of $55, you still made money overall.
The averaging down strategy does carry risks and it doesn’t guarantee profit in a stock. Sometimes, a falling stock price means that a company is in trouble. If a stock price is down for company-specific reasons rather than just following the trend of the overall market, averaging down would be the same as making a bad bet at a poker table. So if you’re interested in averaging down your stocks, make sure to talk to a licensed financial advisor, such as the ones at PROVEN Wealth. You can find them online at provenwealth.com and on social media @weareproven.
Author: Kalia Ellis
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