2

When I buy a stock and it falls, I tend to have this desire to buy even more shares of that stock, hoping that I will "average" out that higher price I had.

However, sometimes, it just feels kind of silly because, first, of course I don't know whether it will drop further, and second, I don't know whether it's worth loading more shares for the sake of reducing my loss.

For example, I've recently purchased Apple stock priced at about 147. It went down to 144 the following day. That's about a 2% drop in price. My first instinct was to buy more to average out my initial price. But as I try to rationalise my decision, I realise that I don't know how I should decide whether to buy more or not.

So, my question is, how should I decide whether I should buy even more shares when its price drops?

Improve this question
13
  • 6
    How did you decide to buy the shares in the first place?
    – VBCPP
    Jun 15, 2017 at 16:04
  • 1
    Whether you already own some or not is irrelevant. You should only buy stock is you reasonably think it will go up from its current price.
    – D Stanley
    Jun 15, 2017 at 16:06
  • @VBCPP Okay you are right that I should have had this considered too. So basically, I bought it because I saw there was some sort of momentum going on. I was hoping to ride on it.
    – xenon
    Jun 15, 2017 at 16:06
  • 1
    If you're investing blindly then yes it is very much luck. Unless you can understand, analyze, and compare things like financial statements, competetive advantages, market conditions, and potential for future cash flows (which is all VERY hard), then you should not be buying individual stocks and expect that you'll always win. Sometimes you'll be wrong. If that doesn't sit right with you then you should not be investing in individual stocks.
    – D Stanley
    Jun 15, 2017 at 16:10
  • 4
    Given that you don't seem to have any strategy other than it "feels right", you should not be buying individual stocks. Instead, buy an index ETF like VTI or ITOT.
    – new name
    Jun 15, 2017 at 17:50

2 Answers 2

Reset to default
5

A key principle of economics is: Sunk costs are irrelevant. You bought the stock at 147 and it has now fallen to 144. That's too bad. This has nothing to do with whether it is wise or foolish to buy shares at 144. The only relevant thing to consider is: Do I expect the stock to go up or down from 144?

You have lost $3 per share on the original buy. Buying more shares will not "reduce your loss" in any way.

Suppose you bought 100 shares at 147. The price then drops to 144. You have lost $3 per share, or $300 total.

You buy another 50 more shares at 144. The price stays at 144. So your average purchase price is now (147 x 100 + 144 x 50) / 150 = 146. So I guess you could say that your "average loss per share" is now only $2. But it's $2 x 150 shares instead of $3 x 100 shares. You still lost $300. You didn't reduce your loss by a penny. Maybe it made you feel better that you reduced your average loss per share, but this is just an arithmetic game.

If you believe that the stock will continue to drop, than buying more shares just means you will lose even more money. Your average loss per share may go down, but you're just multiplying that average by more and more shares.

Of course if you believe that the stock is now at an unjustifiably low price and it will likely go back up, then sure, buy. If you buy at 144 and it goes back up to 147, then you'll be making $3 per share on the new shares you purchased.

But I repeat, whether or not you buy more shares should have nothing to do with your previous buy. Buy more shares if you think the price will go up from the present price; don't buy more shares if you don't think it will go up. The decision should be exactly the same as if you had never previously bought shares.

(I'm assuming here that you are a typical small investor, that you not buying enough shares to have any significant effect on the market, nor that you are in a position to buy enough shares to take control of the company.)

Improve this answer
2
  • 1
    You should emphasize that if the price drops from $147 to $144, you have lost nothing; only if you sell at the lower price is any loss actually incurred.
    – chepner
    Jun 17, 2017 at 18:49
  • Well, there are "realized gains/losses" and "unrealized gains/losses". Yes, if a stock price falls, you don't sell, then it goes up to more than it was when you bought it, and then you sell, you have not lost money, you made money. But if the value of a stock you hold falls and keeps falling and you don't sell because "it's not a real loss until I sell", you may well be deluding yourself.
    – Jay
    Jun 20, 2017 at 2:11
-3

There is no way to find out what future will be if you have only quote from past. In other words, nobody is able to trade history successfully and nobody will be able, ever. Quote's movement is not random.

Quote is not price. Because brokerage account is not actual money.

Any results in past do not guarantee you anything. Brokerage accounts should only have portions of money which you are ready to loose completely.

Example: Investment firms recommended buying falling Enron stocks, even when it collapsed 3 times, then - bankrupt, suddenly. What a surprise!

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .