Averaging Down Calculator
Calculate your new average cost per share when buying more of an asset at a lower price.
What is Averaging Down?
Averaging down is a stock market strategy that involves buying more shares of an asset after the price has declined since your initial purchase. By purchasing more shares at a lower price, you effectively lower the average cost at which you hold the entire position. This reduces the price the stock needs to reach for you to break even or turn a profit.
How to Use This Calculator
This tool helps investors visualize how much their average cost basis will drop by adding more shares. To use it, follow these steps:
- Current Shares Owned: Enter the total quantity of the stock or crypto you currently hold.
- Current Average Price: Enter the average price you paid for your current shares.
- New Shares to Purchase: Enter the quantity you are planning to add to your position.
- New Purchase Price: Enter the current market price or the price at which you intend to buy the new shares.
The Math Behind Averaging Down
The formula for the new average price is relatively straightforward:
New Average Price = ((Current Shares × Current Price) + (New Shares × New Price)) / (Current Shares + New Shares)
Example Calculation
Imagine you bought 100 shares of a company at $100 each (Total $10,000). The price drops to $60. You decide to buy another 100 shares at the $60 price point ($6,000).
- Total Investment: $16,000
- Total Shares: 200
- New Average Price: $16,000 / 200 = $80.00
By averaging down, you lowered your break-even point from $100 to $80. If the stock rebounds to $85, you are now in profit, whereas previously you would still be at a loss.
Risks of Averaging Down
While averaging down can be a powerful tool, it is not without risk. It is often referred to as "catching a falling knife" if the asset continues to decline. It increases your total exposure to a single asset, which can lead to larger losses if the company's fundamentals have permanently changed or if it faces bankruptcy. Always ensure your investment thesis remains valid before adding to a losing position.