Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Average Down

What it is:

Average down (or averaging down) refers to the purchase of additional units of a stock already held by an investor after the price has dropped. Averaging down results in a decrease of the average price at which the investor purchased the stock.

How it works (Example):

Suppose Bob holds 10 shares of XYZ stock that he purchased at $100 per share (for a total of $1,000). Following a market price drop to $70 per share, Bob purchases 10 additional shares of XYZ (for a total of $700). This results in an average purchase price of ($1,000 + $700)/20 shares = $85 per share, lowering the original cost per share by $15 ($100-$85=$15).

Why it Matters:

Averaging down allows investors to lower their cost basis in a stock, reducing the amount the stock must rise in order to show a positive return. However, it also means if the stock continues falling, losses will be greater since more shares are now owned.