So, I wish I were a more saavy investor. But I tend to geek on the maths and the gambling nature of it all. I have a couple of stocks that have done very poorly. One is NEPT, Neptune Wellness, that had a reverse 12:1 split. Meaning for every 12 shares I had, I now owned 1.
Being stubborn I have just held on to it for years now. But it got me to thinking:
I wondered how much I would have to buy in order to bring the average price per share down to where the stock would be more relavant. My average prices per share is $19.35 and thanks to their adjustment, I have 2.828571 shares, How about a table?
|Current Price per share||.7201|
|Total Market Value||$2.04|
|Average Price per share held||$19.35|
|Total Return||-$52.6903 (-96.28%)|
I know! Hence the wondering.
So, I wrote a script to figure out how many stocks to buy to get close to a new desired average price. This is know as Averaging Down.
To continue on with the example of NEPT, I would need to buy 36.72 shares at $.71 for a total of $26.44 to bring my average price down to $2.05.
This would make my overall holdings of NEPT:
|Total Number of Shares||39.55|
|Total Cost of Shares||$81.16|
|Average Price per share||$2.05|
It is important to not that the new average price is also the break even price. If the stock reaches that price, I can sell everything and recoup my total investment. Which, is the point of this whole experiment.
Now the question is; Do I think NEPT can to $2.05?
Investing in the stock market can be a great way to grow your money over time, but it can also be a bit tricky. One strategy that some investors use to try to maximize their returns is known as averaging down.
The basic idea behind averaging down is that, when the price of a stock you own drops, you buy more shares at the lower price. This can help you lower your overall cost basis in the stock, which means that your potential returns will be higher if the stock price eventually goes back up.
For example, let’s say that you bought 100 shares of XYZ stock at $50 per share. A few months later, the price drops to $40 per share. If you were to average down, you would buy an additional 100 shares at the new lower price. Now, your cost basis in XYZ stock is $45 per share (half of the original price and half of the new lower price). If the stock price eventually goes back up to $50 per share, you would see a return of 11.1% on your investment. Without averaging down, your return would have been 0%.
Of course, averaging down is not without its risks. If the price of the stock continues to drop, you will be buying more shares at ever-lower prices, which can significantly increase your losses. Therefore, it is important to have a good understanding of the fundamentals of the company and the market conditions before averaging down. Additionally, averaging down is more suitable for long-term investors, as it requires patience and a long-term perspective.
Another important point is to set a clear limit on the number of shares you want to buy, otherwise, you may end up buying too much shares and leaving yourself exposed to greater losses.
Overall, averaging down can be a useful strategy for some investors, but it’s not without risks. It’s important to do your research and understand the fundamentals of the company and the market conditions before making any investment decisions. Additionally, it’s important to set a limit on the number of shares you want to buy and have a long-term perspective.