Averaging

What is Averaging?

We used to 'average' in our mathematics lessons when we were small. Remember? Well this is basically the same thing. You take two prices, add them together and divide by two (since we took only two prices). That's what averaging is.

What's the big deal?

Well, averaging may seem easy. And yes, it is. But it's implications are what that counts. As we may understand averaging is used to bring the 'average cost' of a stock down. This is called 'Averaging Down'. (there's nothing called averaging up OK?). Say we buy 100 shares at $10, the total cost would be $1000 right? So the average cost per share would be again $10 (1000/100). Say now the prices of this particular stock is going down. Alas! So we see this as an opportunity to bring our average cost down. This is how it's done. Say the price goes down to $8, we buy another 100 shares at a total cost of $800. So we add up both the investments; that would total up to $1800 ($1000+$800).  So if we calculate the average cost per share it would come to $9 (1800/200). Seems pretty good huh? Well that depends. Read further and find out why.

Good Move or BAD Move?

This is a very controversial part of the investment process. In a quick glance, reducing the average cost of a share seems the wisest thing to do. But most experts absolutely PROHIBIT to do this. Of course there are reasonable reasons. The main argument against averaging down is that you're continuously investing or blocking money on a failing stock. The more the price goes down the longer it will take to recover, so actually you'd be stuck with a bunch of loss shares till it bounces back. Positive side is that when the stock price starts to climb again, averaged down stock would have a lower break-even point. That is a lower point from where anything above that point is profits. That has a magnifying effect on profits. And on the downside, if the prices continue to dip further, that too tends to have a magnifying effect of losses. 

Should you do it?

This is not really a question I could answer for you. You should be the overlord of your investment portfolio. However for Investors, averaging down doesn't make any sense at all. Investors look at the long term and a sudden dip in the price wouldn't affect their decisions. For a trader, who looks at the short term, this could be vital. At the end of the day it all comes down to risk management. The higher the rick higher the gain. But that doesn't mean you should burn your fingers in hot water either.

Penny Stock Trading

   

What are Penny Stocks?

Penny stocks may have different definitions in different countries. This is because a Penny stock is kind of a relatively low value stock among the lot. Let's look at it in much clearer sense.  A Penny stock can be a stock priced lower than $1.00; this is the accepted definition is US (according to Wiki). But as I have mentioned above $1.00 could be a considerably larger amount in another country. So they may also define penny stocks as low valued stock compared to the prices of stocks in the respective country. (For example; In Sri Lanka a Penny stock is usually around Rs. 1.00 - Rs. 10.00). In UK it's below £1. 

Features..

However the definition varies from country to country the ground rule is that Penny stock is a stock that is of very low price/value compared to other stocks in the market. So it's generally understandable that these stocks are heavily traded. That is penny stocks can be seen traded in large quantities simply because of the fact that penny stocks give the investor a much more higher purchasing power. 

Also another feature is that these stocks are prone to constant 'manipulation'. We may often here this in the market. This is where large investors buy extremely large number of shares of penny stocks and use media to publicize it. This will lead to a sudden increase in demand for the stock leading to an unnatural rise in the price. Sometimes this rise may count up to 50% gain in one day or even less. The downturn is that this not a permanent increase. The price will fall drastically to it's original level when the big investors sell their portion with a huge gain (due to the rise in price). This is called 'Pump and Dump'. (This will be discussed further in coming articles). The plus side for the small investor is that if you're careful and observe when the big fish hunt for the stock, you can jump in too. That way you can ride the price wave and get out of it when the big fish gets out. This will need constant monitoring of the market, but it's worth a lot.      

However for a day trader Penny stocks could be a gold mine. Simply because Penny stocks tend to fluctuate more than any other stock. Also the negative side is that Penny stocks usually represent small, newly established or companies that are not financially sound. So the risk is there that a Penny stock company could go bankrupt overnight and make you suffer. 

So I think you have a basic idea of what penny stocks are and how they could help you in winning your Stock market game. 

References : Wikipedia

What is the Stock Market/Stock Exchange?

Stock Market

Stock Market or commonly mentioned as Stock Exchange is the market where stocks/shares of listed (Quoted Public Limited Companies) companies are being traded or bought or sold among buyers and sellers. It's as simple as that. But the process is much more complicated than that. 

Let's see how a company enters the Share Market. There are basically two ways, namely;

1) IPO - Initial Public Offering

2) SPO - Secondary Public Offering

IPO

An Initial Public Offering is where a company ENTERS the stock exchange with a share issue to the public. If the share issue is successful (meaning if all shares are bought by the public) it will be considered a valid share issue and the company name will be listed in the stock exchange and allowed to function as a PLC. However if the shares are not fully subscribed (bought) by the public, the IPO will be considered void or a failure and the Stock Exchange will not allow the company to proceed with it's business activities. 

Entering the market with an IPO involves some risk due to the above factor. If the public doesn't feel like the company is a safe and worthwhile investment, they will not buy the shares and the company will be forced to shut down. Why? Because a share issue is the main mode of capital generation for a company and when it comes to an IPO, it is the step which a company tries to generate capital to START a company, so if that fails there's simply no money to start the business. To avoid this companies use a method called "Under Writing". Under Writing means prior to an IPO, the company gets a bank to sign a deal with the company to purchase the shares of a company in the event the public refuses to buy the full amount of shares. This deal offers security for the company as-well-as some assurance for the public that if the bank trusts the company we should not worry too. So Under Writing works in those two ways and help IPOs get successful.

SPO

Secondary Public Offering is where a company ALREADY LISTED in the Stock Exchange issues shares to the public. A company could have many number of SPOs in it's life time. All the share issue except for the first and foremost share issue will be falling under the category of a SPO. SPOs generally do not involve very much risk so Under Writing agreements are not of necessity and even if a SPO fails, it will not threaten the existence of the company. Usually a company goes for a SPO to generate additional capital maybe for expansion activities, new researches and developments and activities like that. So that's about the two main methods a company gets enlisted in the stock exchange.