September 25, 2019 | Investopaper
In the previous article, we discussed how to calculate the average price of the stocks purchased by an individual at different market price. Here, we will elaborate on the advantages of averaging down the price of the stock. Averaging down is one of the best techniques to excel in the stock market. It is based on a simple concept that selling price must be greater than cost price to make a profit. So, below are the 3 advantages of averaging down the cost price of the stock.
3 ADVANTAGES OF AVERAGING DOWN COST PRICE
1. Lowering of the cost:
Averaging down the cost price of the stock will help to lower the cost of the particular stock. For instance, if you buy 100 unit shares of the stock at Rs. 500 and Rs. 400 respectively at different point of time in the stock market, then your average cost price of that particular stock will be Rs. 450. Hence, this will help you to lower the cost price of the shares purchased.
2. Coping with different market cycles:
Averaging down helps to cope with the different market cycles of the stock market. When the market is bearish, this is one of the easiest ways to strengthen your portfolio by adding good companies and their shares in the portfolio at a lower price. On the other hand, during bullish market also, you can use this concept to pick stocks at regular interval.
3. Investment strategy:
Averaging down is one of the best investment strategies in the stock market. You can make a humongous profit by averaging down the cost price of the stock. But on the other hand, if the stock you picked is a bad stock, then you will suffer big losses too.. So, at first, you have to include good stocks in your portfolio.
In our next article, we will discuss the disadvantages of averaging down the cost price.