When to Average down a stock and when not?

When to Average down a stock and when not?

If you are a Stock Market Investor and love to buy stock and hold, what to do if your Stocks fall? Whether to average them down or sell them or just ignore?

Suppose Ram has done his research about XYZ Ltd and then bought few shares of XYZ Company

Case I

After his purchase Stock Price of XYZ Ltd has started moving upside.

Fantastic, Ram must be lucky or he has really done good job during his research. Ram is feeling very happy about his decision.

Case II

Now let’s take opposite case when just after Ram bought XYZ Ltd shares, its stock price turned negative and continuously falling. Maximum time this happens in real life. You may have also faced this situation.

Ram is Frustrated now. He is unable to understand what went wrong in his research or something else is wrong.

He is more frustrated about what he should do next? Whether to trust his research and take this fall as an opportunity to buy more shares or take it as mistake in his research and sell his holding? or just ignore and stay away from any action?

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Before coming to any conclusion, Ram should follow few steps

# Step 1 Cross Check Earlier Research

Before coming to any conclusion Ram should cross check his earlier research. Whether he has missed anything to the best of his knowledge during making decision to buy XYZ Ltd shares.

For example, he has missed an important information that XYZ Ltd is having High Debt or Promoters have pledged their stake or there is any fundamental issue, growth issue or Ram has bought it at price where valuations were already high.

 

If Ram could identify any reason or mistake in his earlier research, then he should admit his mistake and take his call whether to exit from this or hold it. Otherwise, he should look for other reasons for correction in Stock as discussed below

Also read: 8 Best Stock Market Apps for effortless Stock Market Tracking

#Step 2 Other points to be checked

  • Latest Company Announcement – Any Latest announcement by the company, can be checked from BSE site.
  • News in Company – Search in Google with company name. In News section you will find all latest news about company.
  • Insider Trading Activities – What Promoter are doing in this correction. Whether they are buying and taking it as an opportunity more or Selling in correction.
  • Annual Reports, Quarterly Results, Con Call Transcript, etc. Go through all the public reports for last few years. Check if you can get valuable information about company. You may get possible reason for current correction in Stock.
  • Change in Shareholding Pattern: Check latest shareholding pattern declared by company and compare it with earlier few quarterly shareholding pattern declared. Check out, what big players such as FIIs, Mutual Fund Houses, Insurance companies, HNIs, etc. are doing whether they are selling stake or buying more.
  • Corporate Governance Issue, Related Party Transaction or Wrong Investment Decisions – Is there any corporate governance issue with the Company for example related party transaction or Investment by promoters are in doubt.

Once you checked all these points, Now, let’s finally check when to average down and when not?

When to Average Down

  • Nothing wrong with the Fundamental or any other points discussed above
  • Stick to your research
  • Examples – Ashok Leyland – Facing Slowdown in Industry
  • If Have funds, buy more such quality stock
  • Feel Confident that it will Outperform in Long run

Also read: Step-By-Step Guide to Open Demat account with Zerodha in less than 15 minutes

When not to Average Down

  • Issue in Company (Any Factor as discussed goes wrong)
  • Do not average – Admit your mistake
  • Try to sell on rise
  • Example: Yes Bank, DHFL

 

Disclaimer: Stocks referred in this article are just for education purpose only. We are not giving any Buy or Sell recommendation in this article. Please do your own research or consult with an expert financial advisor before investing in Stock Market.

 Also read:

Best Book for Stock Market Beginners – Based on Indian Stock Market

Top 6 Steps Salaried Person should take before Investing in Stock Market

8 Best Stock Market Apps for effortless Stock Market Tracking

The Intelligent Investor Book Review & Summary

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