What Is Average Up?
Average up refers to the process of buying additional shares of a stock you already own, but at a higher price. This raises the average price that the investor pays for all the shares. In the context of short selling, averaging up is achieved by selling additional shares at a price higher than that of the first transaction. A popular trend-following strategy will average up on a position as the price increases. The idea is to lean into your winners.
Understanding Average Up
Averaging up into a stock increases your average price per share. For example, say you buy XYZ at $20 per share, and as the stock rises you buy equal amounts at $24, $28 and $32 per share. This would bring your average purchase price to $26 per share.
It can be an attractive strategy to take advantage of momentum in a rising market or where an investor believes a stock’s price will rise. The view could be based on the triggering of a specific catalyst or on fundamentals.
Some investors use a discipline in their averaging up strategies, planning their purchases for when a stock has hit a certain price, while others base their buying on the performance of technical indicators such as moving average, upward trend or up-down momentum, which compares a stock’s average up volume to its average down volume.
Other investors are agnostic to where the stock price is and will regularly buy more shares as part of a plan. Such a plan could involve a monthly investment added to a given stock.
Strategies for Averaging Up
Averaging up does have risks though. Investors following an average up strategy could expose themselves to increased losses if they wind up buying company shares just before they fall sharply or if the stock price hits a peak. Even if averaging up, you can still take profits as the stock rises by selling small percentages of a position to lock in some gains. That can help to reduce your losses if there’s a sudden reversal in the stock price.
When you average up in a portfolio context, you have to weigh the effect of increasing your position in a stock against the impact on overall concentration. In other words, making sure that weights and investment holding sizes for each stock position are still in line with the target levels you’ve set for the portfolio. This is important if volatility is a concern.
Averaging Up Versus Averaging Down
Averaging up is often contrasted with averaging down, or buying more shares of a stock as its price falls. While averaging down lowers your cost per share, and some advocates of following a value style of investing practice it, the problem with that strategy is that it can lead to greater losses if the stock price continues to fall.