Some Thoughts About Price Averaging

Price averaging can be a very prudent strategy - but only with the right stock or situation of course. Price averaging is useful for lowering the average cost of a stock purchase, and there are two ways of doing that. One is by averaging up, while the other is by averaging down.

Averaging down is often not the best course of action because it is impossible to know where the price decline will stop. Also, it takes discipline to keep buying more stock at regular intervals as the price continues to drop.

Averaging up may be less risky than averaging down. When an investor's stock price suddenly takes a turn for the worse and the price declines significantly due to bad news, the investor holds the position because he/she knows the company and believes the price decline to be a temporary situation. Eventually the stock price will reach a support level, and the investor plans to average up as the price recovers.

Averaging up enables an investor to make a move based only on the price recovery of the stock. It is more comfortable to add money to a stock position when the price is rising instead of declining.

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