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.

When to Buy and Sell your Shares?

This has the been the most famous and age old question regarding Stock Trading. Simply due to the fact that 'When to Buy and When to Sell' is the core function behind stock trading and if you're an expert at deciding this, you can easily be a Pro at trading and end up unbelievably rich!!

Sorry to disappoint you though, but there's really no hard and core rule regarding when to buy and sell. That's the harsh and cold truth. Some may call it intuition, luck or sometimes pretty decent hard work and thought and decision making skills. However it is said and done, there are really a few basic things that you should know that could actually save your life in the stock market and hopefully not end up making losses for you. 

When to buy?

Actually most people think or it may seem very appealing to buy a stock which has it's price moving up. It may logically seem valid. The price is moving up so it will continue further more and when I have enough profit I'll sell it. Just like that. But that's not the correct way to approach the market. You should always focus on stocks that have decreasing price movements. or more like stocks that have lost it's market price and fallen down to a low value. Why? Simply because, if a share was performing well and had dropped to a lower level, it has a HUGE potential to reach back to it's previous price or even further more. A price that is already increasing only has a huge potential to drop. So always we should eye for stocks that have recently lost it's value. Buy them quickly and wait till the prices recover. You cannot loose this way, because the price was already down it wouldn't go any further down but only up. So guaranteed you will end up with a profit.

When to sell?

Buy and sell may seem like two opposites, and it is, but the same core rules as of buying shares apply for selling shares. This doesn't mean that you have to sell when the prices have dropped. The ideal time to sell a stock would be when it shows signs of dropping price. Now, if you picked a stock at a lower value as I've mentioned above any increase in price would earn you a profit, so when the stock shows even the slightest signs of dropping prices, sell them. Don't wait thinking it'll recover, just sell it. You won't loose anything since you bought at a lower price.

So that's about it.

This is NOT buying/selling recommendation. 

Further Reference:

Investing or Day Trading?

Investor or a Day Trader?

We may have heard these terms numerous times from numerous people. It may have everything to do with the Share Market, but still it's two totally different approaches to the market. Lets see in depth what these two terms mean.

Investing/Investor

Basically Investor approaches the Share market with a more long term view and plan in mind. The contrasting factor between the Investor and a Day Trader IS the Time factor. So an Investor will seek for shares/stocks that will generate large profits or benefits in the long run. He will sacrifice his current income in view of a much larger and a profitable flow of cash in the long term. The long term here may refer to a period of usually over 5 years. They will take into consideration of the long term business plan or model of the business, it's Vision and Mission and stably factors. Investing requires a lot of long term vision and patience.

Day Trading/Day Trader

This means the exact opposite of what Investing is. That is, Day Trading involves buying and selling shares/stocks within one business day. Yes! All buying and selling activities should be completed within the same day. No shares should be held for the next day in view of better profits and such. So this is a very tricky business. Day Trader has to be extremely vigilant of the behavior of the market or could end up loosing everything earned in one single day. But in turn, if done correctly Day Trading is the most profitable and successful way of earning easy money. Don't let that last statement ease the weight of the risk of this form of trading. As I've said before Day Trading is an extremely risky business. And equally benefiting if you know the game.