Re: Averaging down on thinly traded stocks
No argument here with Al and Natty's excellent advice on why 'tis better NOT to average down unless you have, to the best of your abilities, a sound strategy for doing so. Since Andrew and I have mentioned that we averaged down on a few stocks, I thought I would explain the context.
Suppose you think ABCD is going to rise on upcoming news, but you are not sure when. You buy 1000 shares @ $10 and, horror of horrors, it starts to slowly slide down. Well, it's thinly traded and has a rather large spread (as is typical for these type of stocks), so that even though the ask is now $9.75 the bid is $9.25. The problem is that if you sell, you have to root for the ask to fall another half a point just to be able to buy it back at the same price, not to mention brokers fees. Also, if the news hits when you are divested, you're screwed.
So you hold and ABCD continues to slide to $9.50 on the ask. At this point you have to make a hard decision. Have I picked a loser, or am I looking at an even better bargain? Kevin will probably tell you that, statistically speaking, you should sell. However, if you have that once in a while gut feeling that the stock will rebound bigtime on the news your expect, then you buy more shares to average your cost down and maximize your profits. Very risky, and only worth doing when you feel lucky. Also keep in mind that prices on cheap stocks sometimes don't just slide down, they plummet.
- Jeff
P.S. Steve, I have delayed my flight until tomorrow because I have spent so much time on-line I have not gotten all my work done! However, I blame Patrick not you, so relax (Patrick is in Florida so it's safe to pick on him). BTW, my plants take Arkenol, not gas; know any place that makes it?
P.P.S. It's great to have Al and Natty contributing to this thread. |
