Averaging Down
Buying more of a stock that fell to lower the average purchase price — favorable on a rebound, but it grows the loss if it keeps falling.
In plain terms
Averaging down buys more of a stock that fell, to lower the average purchase price. Buy 1 share at 100, and if it falls to 60 you buy 1 more, making the average 80. Then you break even just by recovering to 80.
A rebound brings you into the green faster, but a further fall doubles the loss. So it is a "medicine if used well, poison if used badly" method.
What it tells you
Averaging down is the choice of "seeing a drop as an opportunity or a risk." If the company is still good and got cheap on the market's fault, it can be an opportunity; but if the company itself worsened, it only grows the loss.
So the crux of averaging down is "why it fell." Averaging down without checking whether the fundamentals (results, financials) are fine is risky.
Formula
averaging down = buying more of a held stock when it has fallen, to lower the average purchase price e.g. 1 share at 100 + 1 share at 60 → average price 80
What high or low means
If the reason for the fall is temporary and the company is solid, averaging down lowers the average price and favors recovery. Conversely, if the company is structurally worsening, averaging down becomes a trap that grows the loss.
Repeatedly averaging down on one stock makes its weight too large, breaking diversification and concentrating risk in one place.
The biggest risk of averaging down is that "there is a reason it is falling." Averaging down on a stock falling because the company worsened lowers the average price but keeps growing the loss amount. Buying more just because it got cheap is risky. (This is a concept explainer, not a suggestion of a specific trade.)
When averaging down makes one stock's weight too large, the whole portfolio wobbles if that stock goes wrong. Beware breaking diversification.
The psychological comfort of "I lowered the average" can become a trap that keeps you from letting go of a bad stock.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Averaging and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.