What is Average Down, or Dollar Cost Averaging? Perhaps you have a favorite stock that has been steadily increasing in price and performing well. Then a great opportunity comes along when the price drops, so you buy some additional shares.
Called averaging down, your average price for all the shares you own on that stock has now decreased. "Who cares?" you might ask, but if you are measuring the cost basis for that stock, this reduces the amount the price has to go up in order for you to show a profit. But you also risk losing more money if the price continues to go down. Let's say you own 20 shares of Pull Me Down, Inc. that you bought for $150 per share, for a total value of $3,000. Then one day you notice the price has dropped to $100 per share, so you decide to jump on the opportunity and buy 20 additional shares for a total value of $2,000, since you really believe in the future profitability of the company. Your average purchase price is now $3,000 + $2,000/40 shares...to equal $125 per share, lowering your original cost per share by $25.
Some investors would view a price drop as a positive, while others caution that it is a sign the stock might go down further. Experts recommend that you average down only for blue chip stocks that have a positive long-term track record, good cash flow and not a lot of debt.
Related or Semi-related Video
Finance: What is the Historical Trading ...17 Views
Finance, a la shmoop. What is a historical trading range? All right you know how [The question written on a blackboard]
some Wall Street words are arcane, uh no arcane.. they say one thing but they mean [Pong being played]
something entirely different? Yeah well this is not one of those times.
Historical trading range, darn well you could say that AT&T has had a historical [AT&T tower]
trading range at a given price largely because well here's its stock chart for
the last umpteen years and you can see that it hasn't really moved sort of [AT&T showing a fairly consistent price over time]
lived between 30 and 40 bucks a share more or less forever it seems all the
investment gains to AT&T shareholders came through the company paying massive [Definition of dividend written on a 100 dollar bill]
dividends but historical ranges aren't just about stock prices alone like
here's the historical trading range of the price to earnings ratio of the S&P
500 so this chart shows the range of p/e multiples from 1880 to today ish and [Arrows showing the date range on the graph]
note that the lion's share of multiples lived in this band from about ten times [Lion's head appears]
to about 20 times and this was the range of multiples in yes there were outliers
like down here in the dumps after the economic hangover post-world War two [Man welding in a workshop]
repair work and then up here as well where earnings were actually very low
like one-time low so the price to earnings ratio was very high right like [Arrow pointing to the highest peak on the graph]
all the companies missed their numbers horribly went negative and stuff
all right like the company used to trade for 20 bucks a share and earned a dollar
well it might have had in that short period only a dime of earnings when
everything went bad and the world was ending but the stock went down 40 percent to [Picture of a city on fire]
12 bucks and on a dime of earnings while that 12 bucks seemed like a huge
multiple at 120 times but Wall Street knew the world wasn't ending and things
did come back and well here we are doing this video, so the short lived things get
tossed out and when you look at ranges you look at their history not just one [Bag labelled 2008 recession is chucked out the door of a house]
moment in time but decades in the past and you think about the ranges and what [Highlighted area on the graph going further back in time]
it implies in the future if anything and when in doubt yes you just sing Oh home
on the range, where the price to earnings ratio [Girl sat next to a fire with a guitar singing]
plays, or something like that historical trading range that's what it
is go check it out...
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