Averaging Down

Averaging down is an investment strategy where an investor buys additional shares of a security as its price decreases, thereby reducing the average cost per share of the investment. By purchasing more shares at a lower price, the investor lowers their average cost per share, which can lead to greater profits if the price recovers. However, averaging down also comes with significant risks; if the price continues to fall, the investor could end up with a larger loss, as they have increased their exposure to a declining asset.

Example

An investor initially buys 100 shares of a company at $40 each. The stock price then drops to $30, and the investor decides to buy another 100 shares at this lower price. The average cost per share for the investor is now $35, rather than the original $40. If the stock price eventually rises back above $35, the investor stands to make a profit.