In the stock market, averaging is a group of trading strategies that use the basic principle of lowering or raising your share prices to deal with market changes. There are many different types of averaging strategies that a trader can use in different types of markets. For example, in an early bull market, the price of your stock can drop because of averaging.
When strong fundamentals like an increase in PAT and steady revenue growth help, one can add to their stock holdings in small amounts. In a down market, on the other hand, an averaging strategy is used to lower one's risk of losing money, which makes the units bought more profitable. So, averaging is not just for losing trades. You can use this guide to learn about the different ways you can average your stocks out.
Averaging involves executing a number of trades before you exhaust your capital. That is why you need the best online trading company that provides you with the best stock trading platform. We at Zebu find that it is our obligation to provide our traders with the best trading accounts so that they can average their investments with ease.
Here are some of the different averaging strategies used by traders in the stock market.
1. Average down
This is one of the most common ways to average. It is done by buying more shares after the price of the stock drops after the first one is bought. This means that the average cost of all the shares you own goes down. This also means that the breakeven point goes down, which makes it easier to make money. This is shown in the following example. Here is an example: Ramesh and Suresh think that ITC's stock price is going to rise. Assume that both of them have a capital of Rs 1 lakh and need to make a profit of Rs 5,000.