Averaging Down Is Simple, But Not Always Easy

Should I sell or average down? It can be a tough decision.


Definition

Buying additional shares in a company at a lower price than the original purchase price.

As a result, the average price or cost basis lower.

Formula

The formula using the number of shares purchased as well as the purchase price for each buy.

Add the number of shares.

Add the total cost of the shares.

Divide the total cost by the total number of shares.

The result will be the new cost basis.

Calculation

Let's look at an example.

An investor purchased 1,000 share of XYZ at $50 per share.

Then XYZ stock dropped unexpectedly to $10.

At that time, the investor purchased another 1,000 shares at $10 per share.

To figure out the new cost basis, add the number of shares purchased.

1000 Shares + 1000 Shares = 2,000 Shares

Now, let's add the total cost of each purchase.

$50,000.00 + $10,000.00 = $60,000

Now, simply divide the total cost by the total number of shares.

$60,000.00 / 2,000 Shares = $30.00

The original cost basis was $50.

The new cost basis is $30.

This lowers the cost basis by $20.00 which is 40.00%.

You may want to use this Average Down Calculator as you encounter situations when averaging down is an option.

Should You Average Down?

That is the BIG question.

Perhaps ask yourself these questions below to decide.

Why did the stock price drop?

Is it potentially a short-term issue or is it a devastating issue for the company?

What is your time horizon?

Does the company pay a dividend?

This is a decision you need to make.

It could be a great decision or it could be "throwing good money after bad".