Buying a stock is easy but to remain invested in the same for a long time is very difficult. That is the basic reason not everyone is able to create wealth from the stock market. Today in this post we will understand why averaging out a stock is not a good idea.
Why does an investor think that once he has purchased a stock it should always go up?
The stock market does not care whether Ambani has bought shares or you. It all works on demand and supply concept.
Averaging out the stock: Averaging out means buying an equal number of stocks when a stock falls below your purchase price thereby reducing your average buy price.
Every investor has a different way of investing. Some think when prices go down, it is always an opportunity to add up. Whereas some investors say it is wise to start booking profits when prices go up.
If every investor does research properly then there will not be a much demand-supply gap in the market.
What will you do when your purchased stock starts falling below your buying price?
Will you buy more or sell at a loss?
Most of the new investors have a tendency to buy more stocks when its prices go down, in order to decrease the buying price. But foremost an investor should understand why the stock price has corrected/fallen so much.
Investors seldom think deep about the business of the company in which they are investing their hard earned money. Novice investors are happy investing in any stock as long as it increases in price. But the moment it starts going below for their purchase price, it became worrisome for them. An investor should know why he entered or bought in the first place. If an investor knows the idea and moat behind his investment they obviously he can reap a lot of profits without worrying about its future.
Some of the reasons for the decrease in stock price
- Some negative sentiments against the company are being spread which could be temporary.
- The company may be facing a tough time in managing its business.
- Raw material prices have been fluctuating in the market. The aviation sector is very susceptible to crude oil prices.
- You have entered at very high valuation and stock may go through a consolidation phase.
If nothing wrong with the company then also you should not go and buy the moment the stock fall below you purchased price. As an investor should let the prices settle down before making any hasty decision. In some case, there may be some news which is not out in public and some people are trying to manipulate the stock prices.
Averaging out could be very deadly if your prediction is wrong about the company. If stock prices start falling again then you will lose double of the previous invested amount.
An investor should always know the answer to this question: why he purchased this particular stock at first place?