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I am looking at a stock which is currently trading at Rs.1400 and I am looking to go long when the stock falls to Rs.1300. I am planning to buy 500 shares. On the other hand, I am not sure if it will fall to such levels.

My question is - Would it be wise to accumulate 50 shares every time the price dips, so that I can aim at an average price of Rs.1300? Or should I wait for it to fall to Rs.1300 and accumulate all the 500 shares at once.

What are the advantages/disadvantages of both these approaches and which one makes more sense?

  • 1
    Neither make any sense! You are buying into a stock that is falling in price, how do you know when it will stop falling? And why is it falling in price? Is it falling because the market is falling as a whole or is it falling because it is making less and less profits - or even worse - bigger and bigger losses? – Victor Oct 10 '14 at 21:11
  • My philosophy is that the market keeps fluctuating, and even the best stocks lose on days. To me, it is not about the price you exit, but the price you enter at. The company I am looking at, is a blue chip and it has consistent growth. However, it has rallied about Rs.200, in the last 2 months, and I did not have the money to buy it at the time. I am waiting for a correction, because I think it is overbought, and therefore looking to enter at a lower level. However, since it is a good company reporting consistent profits, it may not fall at all and I do not want to miss out on an opportunity – user19894 Oct 11 '14 at 1:24
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If your stock is rising and you want to buy on a dip, the best way to do this is by looking at the chart and incorporating simple Technical Analysis techniques.

Firstly, an uptrend is defined as a price chart with higher highs and higher lowers. If you get a lower high or a lower low (or both), it could be the end of the uptrend - be cautious. This can be seen on the chart below with an uptrend line drawn.

Uptrend Broken

If you draw a trend line you can wait for the price to approach the trend line, bounce off it and start moving up again to buy your stock on a dip. If instead the price closes below the trend line, be very cautious - this could be the end of the uptrend and the start of a downtrend - no telling how low the price will go. If this is the case you can then draw a downtrend line and wait for the price to close above the downtrend line before making your purchase.

  • So, what you mean by this is wait for the price to hit the trend line and throw in all my money, rather than accumulating some at a time? – user19894 Oct 12 '14 at 1:00
  • Yes that would be the better option. You would wait for it to hit or get very near and then rebound back up for confirmation. If it breaks and closes below the trend line then don't buy, as the uptrend might be over. – Victor Oct 12 '14 at 9:31
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Dollar-Cost averaging will allow you to reduce your risk while the stock prices falls provided:

  1. You stick to your plan and do not falter
  2. You have a long enough time horizon
  3. The stock does eventually recover and rally beyond your buy-in.

You must invest a fixed amount $X on a fixed time scale (i.e. every Y days). By doing this you will be able to take advantage of the lowering price by obtaining more shares per period as the price falls. But at the same time, if it starts to rise, you will already have your pig in the race.

Example: Suppose you wanted to invest $300 in a company. We will do so over 3 periods.

       Period  |   Price   |   Investment  |  Shares  | Price/Share Avg
       ----------------------------------------------------------------
        1            $10           $100          10            $10
        2            $5            $100          20            $6.66
        3            $4            $100          25            $5.45

As the price falls, your average dollar cost will as well. But since you don't know where the bottom is, you cannot wait until the bottom. By trying to guess the bottom and dumping all of your investment at once you expose yourself to a higher level of risk.

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    DCA does not work - what happens if the price falls to $1, or how about $0.10? If you bought a stock at $10 and are still looking to buy while it is still falling at $4 you are playing a losing game - for a crash of 60% there must be something seriously wrong with the stock. This could take years to recover (if it ever does recover) - in the mean time you could have invested your hard earned money into an investment that is actually rising and makes you money from day one. – Victor Oct 10 '14 at 23:14
  • DCA was not exactly the question. In DCA, the average price is unknown and the amounts are fixed. I know my average price that I am wiling to pay and looking to buy on dips( variable amounts). – user19894 Oct 11 '14 at 1:42

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