Eli5: with stocks going down why would someone hold and buy more on the way down (average down) and not just sell now and buy again when the stock bottoms out?


Eli5: with stocks going down why would someone hold and buy more on the way down (average down) and not just sell now and buy again when the stock bottoms out?

In: Mathematics

All depends on what the stock is and how the company is performing. If people really think a stock will go up then they will hold the stock

How do you know exactly when the stocks have bottomed out?

Hint: you don’t unless they are already coming back up again, at which point you’ve missed some gains.

Also, sometimes, you “know” what the price should be and you understand that this might only be a temporary drop so either way, you’ll make some gain.

Because you don’t know when or where the stock will bottom out. Either option is a gamble–you might sell now and suffer only a small loss, only for the stock value to massively rally and end the day higher than it started; or you might hold and buy more, only for the stock to tank and stay tanked pretty much forever. If you sell now then you’re making several gambles all at once–you’re gambling that the stock will keep dropping, that you’ll be in a position to figure out when it hits rock bottom, and also be in a position to buy it up at that moment, so overall, the risk is higher.

Depends on a a few different factors such as taxes, cash flow, and the price point that they had originally bought in at. For instance if you began buying a stock when it was at say $10 a share and now have 100 shares with your most recently purchased 10 shares were purchased at $150 but the stock has since dropped to $100 it’s in your best interest to simply hold and expand your position if you believe in the stock and know it’ll go back up rather than sell all 100 shares, be taxed, and then still have to buy back in at a much higher price point than the $10 you had initially bought in.

No one knows where the downs and ups and pivot points will be. Sure, in hindsight you should just “sell when the price goes down and buy when it turns around”, but those are IMPOSSIBLE to predict beforehand. It could just as easily do the opposite when you pull the trigger. Don’t let hindsight fool you into thinking that there are secret messages in the lines. There are not. I say this as a person who’s played in the stock market a LOT. You can trick yourself into seeing all sorts of things if you want to.

If you know when the stock is going to bottom out, why would you have bought it earlier? Trying to time the market is a pretty good way to lose money.

I’ll take your scenario one step further, why not sell at the peak before it goes down? Answer is the same as the other answers you’re getting here, because timing the market is really hard

Nobody — even professional stock analysts — can predict a top or bottom with enough certainty to dependably make more money by selling and buying to avoid losses. Cost averaging is the safer way to account for fluctuations in the market with less risk.

Time in the market > timing the market.

if you are that good to call the market you can no only call the peak but the bottoms too. Majority of retail investors can’t time the market well.

Suggest if you are holding the stock with fundamentals you believe in, a dip in the market is just a buying opportunity.

Thanks for everyone’s answers. I only keep stocks for 5-10 days on average and I can usually time the bottoms within 5-10%. Hopefully it works out but if not wish me luck 🙂