# Average Down

## What it is:

Average down (or averaging down) refers to the purchase of additional units of a stock already held by an investor after the price has dropped. Averaging down results in a decrease of the average price at which the investor purchased the stock.

## How it works (Example):

Suppose Bob holds 10 shares of XYZ stock that he purchased at \$100 per share (for a total of \$1,000). Following a market price drop to \$70 per share, Bob purchases 10 additional shares of XYZ (for a total of \$700). This results in an average purchase price of (\$1,000 + \$700)/20 shares = \$85 per share, lowering the original cost per share by \$15 (\$100-\$85=\$15).

## Why it Matters:

Averaging down allows investors to lower their cost basis in a stock, reducing the amount the stock must rise in order to show a positive return. However, it also means if the stock continues falling, losses will be greater since more shares are now owned.

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