Hi
Does anyone have a calculation they can share for working out averaging down? I have a number of shares I want to average down and it would be useful to have a calculation to work out how many shares I need to buy in order to do so and to sell with a minimum loss.
Thank you in advance for your help.
Isn’t it just a case of buying more shares at a lower price than your current average buy price? That way the average buy price goes down?
Be interested to see if any more logic needs to go into it…
That’s my understanding of it, but I’m happy someone has a formula that can be used to work out how many shares need to be brought in order to achieve my desired share price (essentially to turn it from red to green).
You will never turn your shares from red to green by simply averaging down. They will also need to go up in value afterwards before you turn green.
Example with simple numbers.
You buy 10 shares at a price of £10 per share.
Total value of shares = £100
Average price paid per Share = £10
The shares then go down in value to £5 per share.
Total Value of your shares is now = £50.
You are now in the red.
If you buy 10 more shares at £5 per share (Averaging down)
Cost of new shares = £50
Total number of shares held = 20
Total price paid £100 + £50 = £150
Average price paid per share = 150/20 = £7.50
You are still in the red, but the price only has to go back up to £7.50 before you are in the green again.
looking back at your original post… If you are planning on selling the shares that are in the red and want to loose less per share by averaging down before selling them, then this is a futile exercise. You will loose less per share and so the numbers might look better, but you will have lost the same amount of money.
In my example above:
If you simply sell the original 10 shares at the new price of £5 per share then you will have lost £5 per share.
Your loss will be 50%
Total loss = £50
Alternatively if you average down, as in the example and then sell all the shares at £5 per share.
You will have lost £2.50 per share
Your loss will be 33%
Total loss = £50
As you can see the total loss is the same, though the % loss looks better.
The real advantage of averaging down is it brings your average price paid per share down. So when the price goes back up, you go into the green quicker.
I believe that you are looking for this:
X = Y* (P1-Pt) / (Pt-Pc)
X= number of share that I need to buy
Y= number of shares that I already have
Pc= current stock price
Pt=average price target
P1= average price of my holding
This is very helpful, thank you.
You might want to spend a bit of time googling/researching ‘share price support and resistance’. it should help you optimise your buy-in’s / averaging down strategy.
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