It often happens with traders that when they buy any shares and their price starts falling down and most of the time continuous falls in share price can result in losses which result in traders and investors selling fundamentally strong stocks landprime.
But instead of selling the good fundamental stocks on their fall in prices, you could average them to minimize the losses and earn good profits. Read in detail about what is averaging in stock market.
For Averaging it is important to know the following:
The concept of averaging
How does it work
When should we do averaging
What is Averaging Down?
If the price of the shares that you have purchased falls, then we can again buy back those shares at a lower price rather than selling, which helps to lower our average buying price and this process is called averaging in the stock market.
For example: Suppose we have purchased 100 shares of stockdaddy for Rs. 1000 and the value of the investment is Rs. 1,00,000 Now if the share price of stockdaddy falls at 900 per share, then you are facing a loss of Rs. 100 per share. Now we have three options:
Sell: The first option is to sell the shares of stockdaddy at Rs.900 per share and face losses of Rs.100 per share which results in a total loss of Rs. 10,000 for 1000 shares and prevents further losses.
Hold: If you have to buy any stock then you also need to believe in it and consider the falling price is a temporary phenomenon and to hold the stock of stockdaddy.
Buy: The Third option is that you can take the advantage of falling share prices and buy more shares of stockdaddy as they are being sold at discounted prices.
Now suppose, we decided to buy 80 shares of stockdaddy at Rs. 900 per share and we again made the investment of Rs. 72,000.