When an investor buys more securities at a lower price than the initial investment, the move is called averaging down. It is done in order to reduce the average cost per investment unit.
Points to Remember:
Averaging down helps in reducing the net cost of investments, leaving more room for gains.
On the contrary however, if the investment value continues to fall after averaging down, it may lead to more losses.
Example
For example, say a person buys 10 shares at Rs. 100 each (Total= Rs. 1000). Now, say the market price drops to Rs. 80 per share and he again buys 10 more shares (Total= Rs. 800). Now the average purchase price becomes (1000+800/20)= Rs. 90. This shows that the original cost price was reduced by Rs. 10.