In all likelihood, many investors have heard what it is like to average on the stock market. Of course, but another part of them may ignore what this unique investment strategy consists of. First of all, it must be clarified that it will be very different if it is applied on earnings, or on the contrary, on capital gains. Not surprisingly, its meaning will be completely different, and with an uneven operating mechanism.
This kind of operations occur mainly among small investors who have less experience in equity markets. They are the ones who use them the most, bordering on risk at times. From this moment the word averaging will become very popular through explanations of their actions. But not for this reason, they should be used, much less with some frequency.
Averaging on the stock market can become a very beneficial or detrimental action for your interests as a saver depending on how you apply it. And especially with the intensity that you give to these very special operations. Noting that it will only be mentioned about its management over the stock markets, and not on other financial assets (currencies, precious metals, raw materials, etc.).
Average Down
We are going to start precisely on this trend, which is the one that offers the greatest dangers for investors, as you will be able to verify in this article. As well, average down It is done when you have lost a lot of money and bags and decide to make new purchases in the same value to try to cancel the depreciations of your portfolio.
The first thing that indicates that your positions are not doing well in the financial markets. Not much less. On the contrary, you have evaporated a lot of money and surely you make the new purchases at lower prices. This strategy is completely normal since the shares have lost part of their value in the equity markets. Maybe even with excessive virulence.
These operations are developed when the trend of the value is clearly downward. So it is not surprising that it is a very dangerous move for your personal interests. Simply because they can lower their prices, and consequently the handicaps can be exacerbated in your income statement. Up to levels highly inadvisable to bear.
You can do it exceptionally only once, but not repeatedly, or with a certain frequency. The only thing you will achieve is to harm yourself in the most illogical way possible. Since it is not even considered as an investment strategy. Only lousy investors use it from time to time, but most of the time with little success.
Effects on investment
The first consequence that you will notice in your investment portfolio is that it can decline quite quickly. To the point of evaporate part of the invested capital in equities. Surely you have a friend or family member who has experienced this unpleasant process. Do not follow him in the attempt if you want to preserve your financial contributions.
It is preferable that opt for other less complicated values, without having to average in any kind of operations in the financial markets. Not surprisingly, it will be the most unfavorable scenario of the entire bag. Do not hesitate, because it is so, as witnessed by a good number of small investors, especially those who have more learning in the equity markets.
One of the most serious consequences that these movements can generate is that you lose more money than expected in your expectations. Even in the most serious cases it can ruin people who opt for this risky strategy developed for investment. The best advice you can have from now on is not to use the downward average under any circumstances.
Average up
This operation, although it is developed under the same mechanics, is diametrically opposite. And the reasons are precisely the same, but in the opposite direction. By checking that your shares are appreciating in the financial markets, you try to take advantage of this movement. And in what way? Well buying new shares. The consequences will not be long in coming in the form of new capital gains. Up to levels where you can't set limits, far from it.
They are very favorable operations for your personal interests, and if you formalize them you will be able to close the positions with a much more abundant balance than you initially expected. The only requirement to formalize these rising averages is that equity markets have a clearly defined trend and is bullish. And of course, a more than healthy checking account to make purchases of shares at any time.
Shares will be bought at various price levels, all of them in an uptrend. So that you are building a very powerful investment based on the capital contributed. It will be higher than in other operations you have previously performed. But for this precisely the reward will also be much more generous. You will be able to experience it through simulations on the stock market without risking a single euro.
It will generate greater contributions
One of the main consequences of averaging, both lower and higher, is that you will have more money. This aptitude will print more risks to operations, and of course above the usual. It is convenient that you take this into account so as not to run out of liquidity in your checking account in the face of the expenses that you will have to face in the coming months: payment of bills, tax obligations, debts to third parties or directly the installment of your mortgage.
It will also affect that the gains or losses are more bulky than in the more conventional operations. In this way, the risks will increase to very worrying levels in all cases where you give up part of the deposited capital. It will not hurt for you to consult your lifelong financial institution for a solution, and who knows if even a favorable alternative for your personal interests.
In any case, the buybacks should be for a not very high number of times. The less you average the better you will do. It is preferable to carry out new operations in the financial markets than to focus on just value. You will have one of the broadest and most diversified offers that exist in the investment sector. Do not try to become a millionaire under this unique strategy. Not in vain, it may have the opposite effects.
Why shouldn't you average?
The first reflection that you should make from now on is that it is not positive to carry out such controversial and risky operations. The answer is very clear, since it is because not the idyllic setting for any investor. Whatever profile it was, they should not do them under any scenario. Even very limited in the bullish cut processes.
Averaging does not solve any problem in equities, quite the opposite. Helps sharpen them, and even in a very worrying way for your interests within the financial markets. Not surprisingly, you have other more beneficial investment techniques that are based on a much more refined technique. When you average on the stock market it means that things are going very badly for you in the markets, and it is the only resource you have left.
You must seriously consider starting these movements. In a few moments you may regret having carried them out. This is the feeling of many investors who have gone through this scenario. Where a few days after formalizing this curious rounding they have the feeling of the serious mistake they have made in their strategy. Don't be one of them.
Investment tips
To avoid not having more than one problem in your relationships with equities, you will have no choice but to import a series of useful tips that will make you get out of more than one trouble in your operations carried out in the financial markets. It is convenient that you take them into account to be modeling your positions in a correct way. And especially to protect the savings bag that you are going to invest in this model.
- If you find that you are losing a lot of money in the stock market, do not average. It is much better to definitely abandon your positions to avoid further losses on invested capital.
- In order not to get involved in a process as dangerous as this, you should only open positions in equities in securities that move under an uptrend very well defined.
- Control all your savings, and do not make investments without any sense. They can only generate harmful effects on your checking account balance. More than you think from the beginning.
- Only investors with less experience They are responsible for materializing this ineffective strategy. Losing more money than necessary in each of the operations opened in the financial markets.
- Before averaging, you may be losing a high percentage on your investments. But perhaps what you do not know is that to materialize this strategy you can leave the way much more effective.
- Do not think that through this technique you are going to improve your positions in equities. If not, you will worsen your presence in the financial markets, and perhaps in an unsolvable way.
- Averaging stocks lower is no solution to getting out of a somewhat graceful position in the stock markets. It is an error that only from certain circles come to raise. You better not pay attention to these considerations for the pernicious effect that it can generate if you apply them from now on.