In the stock market you may often hear the terms averaging down and averaging up? Is that? Average down or average up is done when you buy a stock. So that you don't make it up, I'll give you an illustration.
On July 15, 2014, you purchased 10 lots of SMRA shares at a price of Rp1,520 (10 lots X 100 shares = 1000 shares). Suddenly the share price of SMRA dropped to Rp1,490. Because the price is still falling again, then, you decide to buy more SMRA shares at a price of Rp. 1,470 for 10 lots (10 lots X 100 shares = 1000 shares), WITHOUT selling your first shares, you bought 10 lots at a price of Rp. 1. 520.
If you buy 2 times, the price will be averaged to the average price. The calculation is as follows.
(1000 pieces x IDR 1,520) + (1000 pieces x IDR 1,420) / 2000 sheets = IDR 1,470
The illustration above is what is called averaging down. You increase your share holdings again when the price is down, without selling the shares you bought.
If averaging up, it means the opposite of averaging down. You increase the number of your shareholdings by buying more shares, but this is done when the share price rises. The illustration is as follows.
You buy GIAA shares at a price of IDR 325 for 20 lots (20 lots x 100 pieces = 2000 pieces). Then, GIAA's share price rose again to Rp340. According to technical analysis, you believe that the stock price of GIAA will continue to rise, so you buy another GIAA at a price of Rp. 345 for 20 lots (20 lots x 100 shares = 2000 lots).
If you buy 2 times, the price will be averaged to the average price. The calculation is exactly the same as calculating averaging down. When you add more stock holdings when the price is going up, without selling the shares you bought before, that's averaging up.
Usually, averaging down is done by traders when market conditions are bad, although that's not always the case. And averaging up is done when the market is bullish even when the market is "happy". Averaging up is indeed suitable to do when market conditions are good and when your stock price is rising.
That's a brief explanation of averaging down and averaging up. So, then you ask: "Which is better, averaging up or averaging down?" Please continue reading my next post: Which is Right: Averaging Up or Averaging Down?.
