Legal Definitions - averaging up

Averaging Up is an investment strategy where an investorpurchases additional units or shares of an asset at prices higher than their initial purchase, as the asset's market value continues to rise. This approach is typically used when an investor is confident that the asset will continue its upward trend, aiming to increase their overall position and potential profits, even though it results in a higher average cost per unit for their total investment.

• Example 1: Tech Stock Growth

  An investor initially buys 100 shares of "InnovateTech Inc." stock at $50 per share. Over the next few months, InnovateTech's stock price steadily climbs, showing strong market performance. Believing the upward trend will continue, the investor decides to buy another 100 shares when the price reaches $65, and then a further 100 shares when it hits $80. By "averaging up," the investor increases their total holding to 300 shares, with an average purchase price of $65 per share (($50*100 + $65*100 + $80*100) / 300 = $65). This strategy allows them to capitalize on the stock's sustained growth, even though their average cost is higher than their initial entry point.

• Example 2: Cryptocurrency Investment

  A cryptocurrency enthusiast buys 0.5 units of "CryptoCoin X" when it is trading at $2,000 per unit. As CryptoCoin X gains popularity and its value rises, the investor observes its consistent upward momentum. Convinced that the asset will continue to appreciate significantly, they purchase an additional 0.5 units when the price reaches $3,500, and later another 0.5 units at $5,000. Through "averaging up," the investor now owns 1.5 units of CryptoCoin X at an average cost of $3,500 per unit (($2,000*0.5 + $3,500*0.5 + $5,000*0.5) / 1.5 = $3,500). This demonstrates increasing their exposure to an asset they expect to continue performing well, despite each subsequent purchase being at a higher price.

• Example 3: Mutual Fund Reinvestment

  A retiree invests $10,000 into a growth-oriented mutual fund when its Net Asset Value (NAV) is $20 per share, acquiring 500 shares. As the market performs well, the fund's NAV consistently increases. The retiree, confident in the fund manager's strategy and the overall market trend, decides to invest an additional $5,000 when the NAV is $25 per share (acquiring 200 shares), and another $5,000 when the NAV reaches $30 per share (acquiring approximately 167 shares). By "averaging up" their investment, they increase their total number of shares in the fund, aiming to benefit more substantially from its continued appreciation, even though their overall average cost per share for the entire holding has increased from the initial $20.