Both are general strategies that investors use . Each one has different meaning and methodologies, but what is each one about?
- Averaging down is a strategy that consists of increasing stock purchases when they are falling in price .
- Averaging higher is the complete opposite movement: it is about buying new stocks as they appreciate in financial markets .
A practical example of averaging down: imagine you invest 1,000 shares in a company, at a price of 5 euros per share. The shares go down and reach a price of 3 euros. You reinvest another 1,000 shares and you will have a total of 2,000. Your average price will be 4 euros per share.
In both steps, capital is increased , although there are also risks if these movements are not considered before making them. Here are some benefits and risks of averaging down and up . It is important to take this into account so that you decide in an ingenious way:
Advantages and Disadvantages of Down Averaging
There are two great advantages of making this move: increasing the profitability of the investments and minimizing the risk of the portfolio . In addition, it allows the investor to enjoy a considerable margin of safety .
On the other hand, the disadvantages of averaging down lie in mistrusting and overvaluing investments . This could fall into a degree of excess.
Risks of averaging higher
Averaging higher also carries its risks, such as:
- Enter very high and that the value falls before an oversight.
- Have a higher accumulation in your portfolio.
- Losing the opportunity for another asset that is much more profitable.
5 investment tips
It is important to know the market you are going to face and have the expertise of an advisor to make the best investment decision. In addition, having practical advice applicable to any operation in the financial market can help you, such as:
- Abandon your position when you consider that your invested capital is decreasing.
- Have the maximum control of your savings so as not to cause negative effects on the current account balance.
- Advise you intelligently and consult a specialist so as not to lose money in your portfolio of stocks .
- It can have negative effects regarding your participation and presence in them.
- Determine the terms in time to invest . It is advisable to do it in the long term to take advantage of the ups and downs of the markets.
Our star recommendation is to contact a financial advisor , who will analyze your investment situation and support you to make the best decision.