May, 2012 5:09 AM
Average Up
Buying equal numbers of shares at successively higher prices than previous purchases. This raises the average price per share, but it is done in order to unload the shares with higher future return, should the stock continue to appreciate.
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By averaging up the investor will increase the size of the stock. The immediate effects of this strategy are that first, the average cost of the stock the investor owns has a lower average cost than the current market price, and second, sustained interest in the acquisition of shares at a higher price may push the price even higher.
If the price continues to rise, such an investor will see significant gains from selling the shares he bought during the average up. Large stocks, however, can produce significant losses if the price starts falling.
As a result of this inherent risk, investors need to be prudent when selecting the shares they average up, in the sense that there must be a high degree of confidence in the stock’s future growth prospects.
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