How to Average Down Stocks
Anyone who has been watching the stock market lately knows that stock prices can fall sharply, and rise just as rapidly. The volatility inherent in the stock market can be daunting, but those rapidly changing prices can also provide savvy investors with some real opportunities. By putting in a little bit of money at a time, stock market investors can keep the average costs of their investments low---and their long-term profits high.
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Instructions
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Use your existing brokerage account to purchase the stock (or stocks) you wish to own. Be sure to do your homework before the purchase by looking at each company's balance sheet, earnings and liabilities. You can reduce your risk by averaging down your purchases but this strategy will not turn a bad stock into a good one.
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Set up a monthly investment that transfers money from your bank account to the cash fund in your brokerage account. This will accomplish two important goals---first, it will instill the discipline you will need to be a consistent investor over time, and second, it will provide the money you need to add more money when your stocks have taken a hit.
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Use a spreadsheet program like Microsoft Excel to track the average cost of your mutual fund or stock market investments. Record the amount of your initial investment, the cost of each mutual fund share or share of stock and the number of shares you own. Repeat this process each month when you receive the statement showing how many shares your monthly investment has allowed you to purchase. Update the spreadsheet each month and use it to calculate the average cost of each share you own.
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Track the price action of the stocks you own, and the stock market as a whole. Buy additional shares of your chosen stocks when their price performance is weaker than the stock market as a whole. For instance if the stock market takes a 1 percent hit on a particular day but your stock is down 3 percent, investing in more shares may get you more for your money.
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Keep an eye on the news as it relates to the stocks you own. When these news stories break, watch how the price of your stock reacts. Short-term bad news can present you with a buying opportunity, but sustained bad news could be a sign of impending trouble. Always keep your average cost spreadsheet up-to-date so you know the average cost of the stocks you own---this will make it easier to determine the amount of profit (or loss) your averaging down strategy is giving you.
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