What is the average down?
On average, an investment strategy that refers to the purchase of multiple shares already owned at a lower price than what was previously paid. The overall effect is to reduce the average to the price paid for stocks. Most experts agree that the average strategy of mines is beneficial in some cases.
The average calculation of down is simple arithmetic. It includes the distribution of the total amount of money invested into a certain share by the number of shares held. For example, let's say that the investor buys 50 shares of the company and for $ 10 (USD) and then decides to reduce on average when shares fall to $ 8 by purchasing 50 additional shares. To calculate the new average costs of its shares, the investor would take the total spent for stocks - $ 900 - and divided it with the total number of shares, in this case 100 to come up with an average price of $ 9.
In this case, the investor effectively reduces the amount he "lost" to the stock by half. Rather than $ 2 per share per share because the investor was when the actione dropped to $ 8, he or she now is only $ 1 per share. This type of average down -down strategy is often used to respond to short -term market changes.
Averaging dollars is a specialized form of averaging. Rather than being a reactive strategy, however, this is usually a consistent, planned strategy designed to use changes in the stock market in the long run. One of the most common examples of dollar average is a typical pension fund, such as the 401 (K) plan, which invests in mutual funds. In general, the participants of these types of plans contribute each month a specified amount that is aimed at purchasing mutual funds at the current market price. For several months, the investor will be able to buy multiple shares and other less, with the total cost per share set by the same and the amount described above.
In general, the aim of the averaging is to come out better than one could have differently. Whether withE tries to maximize profits or just minimize losses to be successful, the stock price usually has to increase above the average price per share. For example, if an investor of the company and the above is later able to sell its shares for $ 10, it has made a profit of $ 1 per share based on the average cost of $ 9. If this investor only stuck with shares purchased for $ 10, he would only break.
Experts generally agree that the average strategy of mines should only be used if the investor is convinced that shares prices will rise. They usually warn that buying multiple shares that lose value can be a risky proposal. If the stock price continues to decline, the investor usually ends with additional shares with a loss.