The Art of Increasing Your Position
Hey all,
There are a lot of investors (most likely the majority) who when they invest in a company, tend to go full force and buy in at one price. While this strategy is by no means a bad one, I personally believe there is a better one. This is what's called increasing your position.
Let's do an example:
Person A: Buys 1000 Shares at $1.
Total price: $1,000
Total Shares: 1,000
Person B: Buys 500 shares at $1.
Watches the price action, and sees that it dips to $0.90.
Buys 556 more shares at $0.90
Total price: $1,000
Total Shares: 1,056
These two investors spent just about the same amount, but because person B waited an increased their position, they received 56 more shares. This was because Person A had an average price of $1/Share while Person B had an average price of $0.95/Share. In this scenario, it was worth it for Person B to wait to increase their position.
However, with every potential action, there is always the chance of the opposite occurring. We could draw out the same scenario, but let's say instead of the price dropping to $0.90, we see it increase to $1.10. In this case, in the short run, Person A had the better buy option. Person B is left with three options:
- Increase their position at $1.10, getting a higher average price/share
- Take their remaining $500 and invest it elsewhere
- Wait in anticipation of another price drop and then increase their position.
Take-aways:
Increasing your positions can definitely benefit the investor by lowering their average price of investment. However, this isn't a sure way to better your investment, as the price could just level out or even increase. In a scenario like this, someone who wishes to increase their position has options to choose from. At this point it is more of a thinking game. This is how we create smart investors.
As always, if you liked this post please be sure to leave me an upvote and follow me for more content and advice like this. If you didn't like it, let me know why in the comments. I'm curious to see where you all are with investing and also encourage you all to add more advice in the comments. Keep crushing it!
Alex