Definition of Averaging Down

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.