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3 Things to Think about before You ‘Average Down’ on Your Shareholdings in a Company (Guest Post)

3 Things to Think about before You ‘Average Down’ on Your Shareholdings in a Company (Guest Post)

I have received a number of emails and private messages the past couple of days seeking my advise on whether they should “average down” their shareholdings in a company.

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This post was originally posted here. The writer, Lim Jun Yuan is a veteran community member and blogger on InvestingNote, with username known as ljunyuan and has 1055  followers.

While I am unable to give you a definite answer on whether or not you should “average down”, as all investors think and do things differently, and are unique in their own ways, but there are a few things (3 in particular) you can ask yourself which I hope will help you make the final decision.

Before I reveal what these three things are, let me first talk a bit about what does “averaging down” mean (for those who may be hearing about this for the first time) – in layman terms, it simply mean you increase your shareholdings in a company that is currently trading at a lower price, and in so doing, you bring down the average price of your shareholdings in the company.

To explain this with a simple example, let’s say you originally have 1,000 shares of Company A at S$10.00. However, the share price of Company A is now trading at just S$5.00, and the act of “averaging down” means you increase your shareholdings in Company A at its current trading price; assuming you decide to buy another 1,000 shares at S$5.00, then the average price of your shareholdings in Company A becomes S$7.50 now, which can be calculated as follows:

Initial Purchase: 1,000 shares x S$10.00/share = S$10,000

Additional Purchase: 1,000 shares x S$5.00/share = S$5,000

In total, you have now invested a total of S$15,000 in 2,000 shares of Company A.

As such, your average price in Company A is S$15,000 divided by 2,000 shares = S$7.50

Now that you have a better understanding of what “averaging down” means, let me share the three things you can look at to help you decide whether or not you should do so:

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