| Dollar cost averaging is the practice of buying more | | | | The risk is that the stock will continue heading south |
| shares of a stock that you own as the price declines. | | | | and all you have done is throw good money after |
| You are lowering your average cost per share buy | | | | bad money. The only way you should consider |
| buying the stock at a lower price. This is commonly | | | | averaging down is if the stock dropped for no |
| referred to "averaging your cost basis". When the | | | | long-term fundamental reason and is now beginning |
| stock rebounds you will be establishing an overall | | | | to recover. Depending on the rate of recovery you |
| profit on all of your shares. | | | | could conclude that the stock should be shortly |
| Let's take the example of ABC Company whose | | | | above the price of where you bought it. By buying |
| stock you own at.50 just dropped to.25 in one week. | | | | the stock, you are then locking in a profit as the |
| Instead of liquidating your position at a possible loss | | | | stock moves up. |
| you buy 10,000 more shares at.25. Your average | | | | Dollar averaging is most commonly used when an |
| cost per share is now.375. You now only need the | | | | investor wants to make a long-term commitment to |
| stock to rebound back.125 to make a profit on your | | | | owning a stock. The investor has done their |
| entire investment [less any commission of course]. If | | | | homework and believes the stock has very good |
| the stock does move beyond.50 based on the original | | | | potential in the future. They simply use this strategy |
| reason you bought the first 10,000 shares, you will | | | | to buy on dips to end up with a better overall price |
| have an average cost of.375 and a high profit than if | | | | and lower cost basis when it does come time to sell. |
| you had bought all of your shares at.50. | | | | |