What is Average up?

Average up is an investment strategy in which people purchase stocks at increasing prices in a rising market. This technique is used when people believe that a stock's value is on the rise and thus their investment will be repaid when they eventually decide to sell the stock. The opposite of averaging up is averaging down, in which people buy stocks at steadily decreasing prices as their value falls.

When someone decides to average up, she or he is already holding some stock, and the price is rising. The investor buys some more shares at a higher price, which drives the average price paid up. The investor can continue to buy until a desired position has been reached. In the long term, using an average up strategy can allow people to buy a small amount of stock when the value is relatively low, and to increase holdings as the value rises and it becomes more practical to hold more stock.

For example, someone could buy 100 shares of stock at $10 United States Dollars (USD) per share. When the price rose to $20 USD per share, the investor could buy another 100 shares in an average up move. The investor now holds 200 shares with an average value of $15 USD. While the average price paid has risen, the investor has still paid less than the current price per share, on average, for the stock. The investor could also opt to buy another 100 shares when the price hits $25 USD, bringing the average up to around $18 USD per share.

The danger of using this investment strategy is that there is no guarantee that stock values will continue to rise, and the investor could be left holding a bad position, with stock which is worth less than the average face value. However, usually the stock's value would need to decline precipitously for this to happen before the investor could get out of the position by selling some of the stock.

Before someone decides to average up care is usually taken to research the stock involved to determine whether or not it would be a good investment. This strategy does not work well with all stocks and in all markets and it can be advisable to consult a financial adviser if someone has not made many investment decisions before. Numerous financial publications also provide detailed company profiles which include discussions about the history of stock values which can be useful when deciding how, when, and where to invest.