When Should You Average Up Or Down? Answers from The CIO

Welcome to Money Matters!

Our readers and customers have had some great questions on investing, market sentiments & more.

So, we got our CIO, Jaspreet Singh Arora, to answer them for you. With over 18 years of experience in capital markets, he leads equity research at Equentis.

Q1: Is technical analysis better than fundamental analysis?

There is no right or wrong answer. Both are used for different purposes when investing. Technical analysis is performed by investors who are active traders, i.e., who buy and sell stocks quickly. These short-term investors study current patterns based on historical price and volume data. 

Parameters Considered for Technical Analysis

• Market sentiment parameters such as moving averages, Relative Strength Index
• Timing of trades to understand when to enter & exit trade
• Historical price & volume of shares traded

On the other hand, Fundamental analysis is performed by investors who invest for long-term gains. They usually have their funds invested for three years or more. As the name suggests, fundamental analysis is the study of a company’s background in detail, which gives better insight into how solid or volatile a company is. 

Parameters Considered for Fundamental Analysis

• Financial statements
• Competition 
• Management quality 
• Intrinsic value of a company

Q2: When should we average? When the price goes up or down? 

Investors often use averaging to lower the buying price of a stock. This is usually done by buying more company shares in the portfolio when prices have dipped. Doing so means the average buying price is lower than the initial buying price of that stock.

Whether you should average when the price goes up or down depends on your investment goals. 

Conditions when an investor considers ‘averaging down’ (buying when the price is down)

This strategy is commonly used for the long term. E.g., if you buy 100 shares of a company ‘X’ at Rs. 200 each, then it would be – 200 * 100 = 20000

Suppose the price for ‘X’ came down to Rs. 100, and the company fundamentals are powerful. In that case, you might want to buy more shares to make the most of the low price of a good stock and increase the number of shares you hold. Therefore, say you buy 100 more shares at Rs.100 this time, then your total becomes – 100 *100 =10000

So, you now have 200 shares at Rs. 30,000 (20,000 initially + 10,000). 

This makes the average price of this stock for you Rs. 150 (30000/200).

This is Averaging down. It’s a win-win situation: the buying price is lower than the original price, allowing you to increase your holdings and earn higher returns in the long run. 

Conditions when an investor chooses to ‘average up’ (buying when the price is up)

Averaging up is usually done when an investor wants to add more company shares with the belief that the stock price will increase further. It usually happens when a company has massive growth plans or a breakout, making investors trust its growth. Therefore, they tend to buy more shares despite the increase in average price. 

Averaging can be a strategic move, but whether you should do it when the stock price goes up or down depends on your investment strategy, risk tolerance, and the specific stock situation.

Q3: What impact does US debt have on the market?

The U.S. debt is a significant factor in global financial markets, with broad-reaching impacts, including the Indian stock market. As of 2024, the U.S. national debt is over $33 trillion, more than 100% of its GDP. 

The growing debt levels raise concerns about the sustainability of U.S. fiscal policy, particularly as interest payments on the debt consume a higher portion of the federal budget.

Impact on the Global Market:

1. High U.S. debt may lead to rising interest rates as the government must offer higher yields to attract bond buyers. It can increase borrowing costs globally, affecting investments and corporate profits.
2. The dollar may weaken if the U.S. debt levels affect its stability. A weaker dollar may make U.S. exports more competitive but can cause capital to flow out of emerging markets as investors seek safer assets.
3. U.S. debt-related concerns may contribute to global market volatility, making investors cautious. In such a scenario, foreign investors might reduce their exposure to riskier assets, including Indian equities, leading to market corrections.
4. High U.S. debt can impact global commodity prices. For instance, if debt concerns lead to inflation fears, commodity prices might rise, affecting input costs for Indian companies, particularly in sectors like manufacturing and energy.

As per the latest data, FIIs hold about 20% of the Indian equity market. Any shift in FII sentiment due to U.S. debt issues could significantly impact the market. 

So, while the U.S. debt is a domestic issue, its ripple effects may be felt globally, including in India. Depending on how the U.S. debt situation evolves and impacts global investor sentiment, the Indian stock market may see volatility and shifts in capital flows.

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