When you dive into the world of stock trading and investing, aside from dealing with Fundamental, and Technical Analysis you will be dealing also with numbers. Yes! the stock market is dominated by numbers so you need to polish your skills and make friends with Average.
Cost Averaging is one of the ways to win in the stock market, if you are an investor and is thinking long term, this method is very effective. The principle is to buy shares below your target price and to make sure that your total average share price is still below your target price! This method enables you to regularly buy shares.
So what is the magic formula? Without further ado, here it is…
To explain:
- For example: You have CEB in your portfolio, let us say you have 300 shares and its average price is 90.
- Since the current market is in down trend and you want to take advantage of the cheap prices. You plan to buy 200 shares at 70 average price.
- By substituting the values the formula will now be like this:
By doing basic arithmetic, you will be able to get the result of 82 which is 8 lesser than your current average price of 90. You can repeat the process when buying another set of stocks but now using 82 as your current stock average price.
I've created a calculator based on this formula to make it easier for readers to calculate. Refer to this post: Weighted Average Calculator.
Note: The average price is a combination of the current stock price and its corresponding buying fees. If you are using COLFinancial as your online broker, refer to this link How Much are the Trade Charges?
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