What is averaging down stocks? Strategy explained
The averaging down stocks strategy involves buying additional shares of the same stock after its price has fallen below your initial purchase price.
The idea is simple: if you believed the stock was a good investment at a higher price, it may appear even more attractive at a lower price. A lower price does not necessarily mean better value; investors should reassess the reasons for the fall and the investment case.
By purchasing more shares at lower prices, you reduce the average cost (breakeven point) of your position. If the price later rises above this average, the overall position can return to profit.
However, this strategy depends on a critical assumption: the stock will eventually recover.
That assumption is not always correct. Stocks can continue falling, remain depressed for long periods, or never return to previous highs.
Factors to consider before averaging down
Before adding to a losing position, consider:
Has anything fundamentally changed? (e.g. earnings outlook, industry conditions, management)
Is the decline temporary or structural? (short-term volatility vs long-term downtrend)
Would you buy this stock today at the current price?
If not, averaging down may not be justified.
Example of averaging down stocks in practice
Assume an investor buys 100 shares at £355. The price drops to £330, and they buy another 100 shares.
The average down formula:
[(# of shares × purchase price) + (# of shares × second purchase price)] ÷ total shares
