Average Down

What is Average Down?

Average down is a term that describes the process of buying additional shares in a company at lower prices than the original purchase price. This brings the average price you have paid for all your shares down. Averaging down is a way that you can lower the cost Basis of your stock and improve your chances of selling high in the future, assuming the stock ultimately goes up in value. Average down strategy does carry risks, however, and doesn't guarantee a profit in a stock.

Average Down Example

To understand average down better, let's take an example for illustration purpose:

An investor bought 100 shares of ABC company at INR 100 with a view that price will increase in few days and he will grab the difference as profit. But, soon after his purchase, the stock tumbled at INR 96 and so the investor added 100 more in the Portfolio. The stock went down further to INR 90 and the investor bought added 100 more to the portfolio.

The investor holds 300 shares of ABC company and though the initial purchase price was INR 100, with the second purchase, the average share price of 200 units that investor held went down to INR 97.5 and with 300 units, the average purchase price is INR 95. Here the investor is said to be averaging down the investor's stock holding price.