How does averaging out losses work in financial markets?


How does averaging out losses work in financial markets?


If you are holding on to a company share which is dipping below your purchase price substantially, selling the stock as a knee jerk reaction would offer substantial loss. A better way is to keep purchasing the share at lower levels to bring down the average purchase price of your overall share portfolio for that company.


Hi Meera,

Typically investors who have made losses on a stock tend to buy more of that stock as prices fall. This is under the assumption that prices might increase later and hence, they will make higher profits on the stock. However, this is not a great method. If prices stay low for an extended period, you might have no choice but to sell the stock. There are also cases where the liquidity of the stock falls significantly. This happens when the fundamentals of the stock are not good any longer. So, in order to avoid situations like this, it is best to check why the stock’s price is falling. If the stock’s fundamentals are still good and this is a temporary glitch, you can go ahead and buy the stock.

BB Expert