Glossary
Averaging down
Buying more of a holding after its price falls, lowering the average cost per share but raising the position's size and risk.
Averaging down means buying more shares of something you already own after its price has dropped, so that your average cost per share falls. It can make sense when your reasons for owning the investment still hold and the position stays a sensible size. It is also one of the most common ways traders turn a manageable loss into a large one, which is why it deserves careful thought.
How it works
Your new average cost is total dollars invested divided by total shares held.
The lower break-even point is real, yet the arithmetic hides a shift: you have doubled your exposure to a stock that the market is currently valuing less.
When it helps and when it hurts
Averaging down is close in spirit to dollar-cost averaging into a broad index fund, where adding at lower prices has historically worked because diversified markets have tended to recover over long periods. A single company carries no such tendency: it can fall because its business is genuinely worse, and some never recover.
Questions people ask before averaging down:
- Has anything changed in the company's fundamentals, or only its price?
- Would I buy this position at today's price and size if I owned none?
- Does the larger position still fit my position-sizing limits and stop-loss plan?
For short-term traders, adding to losers usually contradicts the plan that justified the trade, and many trading rules forbid it outright.