What is averaging and how can it be done?

1. How is averaging done?
2. Why averaging is done?
3. How does averaging work in stocks?
4. How does value averaging work?

How is averaging done?

Simply put, averaging is buying more stocks when the price falls to bring down the overall cost of holdings. For example, you had bought 10 shares of company A at Rs 100/share. So, your total cost was Rs 1,000. Suppose the stock price of A falls to Rs 50 and you buy 20 more shares for Rs 1,000.

Why averaging is done?

It is done in order to reduce the average cost per investment unit. Points to Remember: Averaging down helps in reducing the net cost of investments, leaving more room for gains. On the contrary however, if the investment value continues to fall after averaging down, it may lead to more losses.

How does averaging work in stocks?

Buying more shares at a lower price than what you previously paid is known as averaging down, or lowering the average price at which you purchased a company's shares.

How does value averaging work?

Value averaging works by taking into account the current value of your portfolio, relative to your overall investment goal, to determine how much you need to invest each month. So, if your portfolio is up and you're ahead on your goal progress, then you'd adjust your monthly contribution down.