Legal Definitions - averaging up

Averaging up is an investment strategy used in a rising market. It involves buying equal numbers of shares at successively higher prices to reduce the investment's average cost basis. For instance, if an investor buys an equal number of shares at $10, $13, $15, and $18, the average cost per share is $14.

This strategy is used to increase the potential profit of an investment. By buying more shares at higher prices, the investor is betting that the stock will continue to rise in value. If the stock does continue to rise, the investor will make a larger profit than if they had only bought shares at the lower prices.

For example, let's say an investor buys 100 shares of XYZ company at $10 per share. The stock price rises to $15 per share, and the investor decides to use the averaging up strategy. They buy another 100 shares at $15 per share. The average cost per share is now $12.50. If the stock price continues to rise to $20 per share, the investor will make a larger profit than if they had only bought shares at $10 per share.