Knowing when to Average Down and when to Sell

The average down strategy involves putting more money into a stock after it has declined in value. This type of strategy can be a good tactic, but sometimes, it may be to your advantage to sell instead. Here are a few things to consider about knowing when to average down and when to sell.

Average Down

When you implement this strategy, you are going to be purchasing additional shares of stock at a lower per share price. By doing this, you make the average price of the investment much smaller. The hope is that the stock is going to rebound and you are going to be able to make up the losses and then some. This can be looked at as a high-risk move depending on what stock you are doing this with. You are making yourself more vulnerable to losses and putting more money on the line. Sometimes this strategy pays off big, and sometimes it ends up costing you a lot of money.

Selling

Other investors do not like to use this strategy and instead will sell their shares of stock after a decline. When you are dealing with a company that is destined for bankruptcy, selling the stock will allow you to capture something back from your original investment. It will also allow you to avoid putting more money into a lost cause. Many investors will use a rule that once a stock falls below a certain percentage of its original value, they will immediately sell. For example, if a stock loses more than 10 percent of its value, an investor might decide to liquidate the shares.

Contrarian

If you are a contrarian investor, then you will most likely utilize the average down strategy frequently. Contrarians believe that the majority of investors are wrong, and they will invest in the opposite direction from the majority. Therefore, they are more likely to view a decline in stock price as an opportunity to buy more shares. In order to do this, the investor is going to have to have a positive long-term outlook about the company in which she is investing.

Short-Term Investors

Short-term investors are not usually going to engage in the average down strategy. Most short-term investors look at a decline in stock value as a negative thing. Because of this, they are most likely going to liquidate their shares and move on to something else. 

Research

There is not a definitive way to tell if a situation merits averaging down or selling. Every investor is going to have to use his or her own criteria when making the decision. However, the best way to come up with a decision is to conduct thorough research on the company in question. By doing some fundamental analysis, you can see if the company is valued correctly or if the stock price is falling because of investor sentiment. This will aid you in your decision to buy more or sell. 

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