When following the average down strategy, investors consider two factors when deciding whether to purchase additional shares of a stock that's falling in price. They add more to a good position when prices are relatively cheaper but they may be compounding a losing position. Should they buy the dip?

What Is Averaging Down?

Buying more shares at a lower price than an investor previously paid is known as averaging down or lowering the average price at which they purchased a company's shares.

Say an individual bought 100 shares of XYZ Company at $20 per share. The average price per share would be $15 if the stock fell to $10 and they bought another 100 shares, essentially decreasing the price originally paid by $5. This is sometimes called "澳洲幸运5官方开奖结果体彩网:buying the dip."

There's an equal loss on the original stock, however, even though the average purchase price would have gone down. A $10 decrease on 100 shares renders a total loss of $1,000. Purchasing more shares to average down doesn't decrease an investor's loss.

Investment Timing

The average investor may be unable to distinguish between a temporary drop in price and a warning signal that prices are about to go much lower. Buying additional shares to lower an average cost of ownership might not be a good reason to increase the percentage of the investor's portfolio exposed to the price action of that one stock.

Investors who follow carefully constructed models they trust might find that adding exposure to an undervalued stock using careful risk management techniques may reprಌesent a worthwhile opportunity o🌃ver time.

How Will I Use This in Real Life?

Investors should always evaluate the company they own and determine the reasons for any fall in stock price. Buying more shares may prove wise if the market is overreacting to something. A lower share price may be 🔥a great opportunity to scoop up more stock at a bargain if there's been no fundamental change to the company.

Begin your trading day with a fundamental assessment of these factors. What happened to affect the price? Why did it happen? Averaging down works best when you have all available informati🅷on a💯t your fingertips.

The Bottom Line

Buying more shares at a lower price than an investor previously paid is known as averaging down or lowering the average price. Investors should evaluate the reasons behind a stock's price decline before buying the dip or averaging down.