Does stock averaging essentially mean profitable in the long run for stock investors?
Not really. It’s a general tendency of most investors to start averaging moment stock prices fall below their initial investment. This means buying a stock, watching it drop and then buying more shares, resulting in a lower average price. You might hear people tell you that averaging down is a great idea, but in fact it’s generally a risky way to operate.
To start with averaging one must have a clear view how long he is willing to hold the stock based on his belief in the management of the company’s stock & the industry sector it operates in. When you decide to take a long time bet on a sector, make sure you choose the companies stock based on strong management principles.
For Example: You decide to invest on stocks in Gems & Jewellery Industry & You choose Gitanjali Gems. You bought 100 shares @ 75 rs. You notice stock sliding to 60 rs – you buy another 100 shares @ 60 rs, taking your average price to 67.5 rs [ (75+60)/2). You notice price sliding to 30rs, you decide to add another 100 shares @ 30rs, taking your average price to 55 [ (75+60+30)/3]. You start panicking when stock prices starts heading below 20 rs. This strategy is no less than holding a falling knife with bare hands.
Important FACT Point checks before averaging: