Averaging Down
Buying more of a holding after its price has fallen, reducing the average cost per unit.
Formula
New Average Cost = (Original Quantity x Original Price + New Quantity x New Price) / Total Quantity
Unit
₹
In depth
Averaging down is sound when the fall is in price and not in value, and destructive when the business has deteriorated — the distinction requires an analysis the falling price itself does not provide. Its psychological appeal is the trap: it converts an admitted mistake into a position that only needs a small bounce to break even, which is why it is so attractive precisely when it is wrong. It also increases position size in the holding that has performed worst, concentrating the portfolio into its weakest idea. Deciding in advance whether and how much to add, before the fall, is the only defence against deciding it under pressure.
Worked example
100 shares at ₹500 plus 100 more at ₹300 gives an average of ₹400 on 200 shares. The position is now ₹80,000 rather than ₹50,000, and break-even requires a 33% rise from ₹300.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Averaging Down” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.