What is the “average down” strategy?
The “average down” strategy is a method of share trading in which an investor buys additional shares of a stock whose price has fallen since the original purchase. The aim of this strategy is to reduce the average purchase price per share.
How does it work?
Suppose you buy 100 shares in a company at 10 euros each. If the share price falls to 8 euros, the value of your investment has fallen to 800 euros, even though your original investment was 1,000 euros. If you now buy a further 100 shares at 8 euros, you have acquired a total of 200 shares for 1,800 euros. This results in an average purchase price of EUR 9 per share (EUR 1,800 divided by 200 shares). Their average purchase price has therefore fallen from EUR 10 to EUR 9 per share.
Why do investors use this strategy?
- Lowering the breakeven price: By lowering the average purchase price, the price that the share must reach so that the investor does not make a loss is reduced.
- Long-term potential: Investors who believe in the long-term growth of a share use this strategy to benefit more from future price increases.
- Psychological advantage: It can be mentally relieving to lower the average purchase price instead of seeing losses.
Risks and considerations
- Market timing: It is difficult to predict when a stock will reach its low point. Further price losses after the subsequent purchase can lead to higher overall losses.
- Capital commitment: Additional investments in falling shares tie up capital that could potentially be used more efficiently in other investments.
- Emotional decisions: Avoid emotional decisions. Carefully analyze whether the reasons for the price decline are temporary or permanent.
Conclusion
The “average down” strategy can be useful in certain situations, especially if you are convinced of the long-term strength of a stock. However, it is important that these decisions are based on careful consideration and not on emotion. A balanced investment strategy and diversification are key elements in managing risks in equity trading.
Please note that this text provides a general explanation and should not be construed as specific investment advice. Every investor should consider their individual situation and risk appetite before choosing an investment strategy.
