What is Average Down, or Dollar Cost Averaging? Perhaps you have a favorite stock that has been steadily increasing in price and performing well. Then a great opportunity comes along when the price drops, so you buy some additional shares.
Called averaging down, your average price for all the shares you own on that stock has now decreased. "Who cares?" you might ask, but if you are measuring the cost basis for that stock, this reduces the amount the price has to go up in order for you to show a profit. But you also risk losing more money if the price continues to go down. Let's say you own 20 shares of Pull Me Down, Inc. that you bought for $150 per share, for a total value of $3,000. Then one day you notice the price has dropped to $100 per share, so you decide to jump on the opportunity and buy 20 additional shares for a total value of $2,000, since you really believe in the future profitability of the company. Your average purchase price is now $3,000 + $2,000/40 shares...to equal $125 per share, lowering your original cost per share by $25.
Some investors would view a price drop as a positive, while others caution that it is a sign the stock might go down further. Experts recommend that you average down only for blue chip stocks that have a positive long-term track record, good cash flow and not a lot of debt.
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Finance: What is Average Down?8 Views
Finance, a la shmoop what is average down or dollar cost averaging well remember the
movie Black Hawk Down, Navy SEALs who were shot down in Somalia then bravely [Solider shooting a rifle]
shot their way to safety until they ran out of bullets yeah [Guy looks upset that he's out of ammo]
well that has nothing to do with average down although you'd think it was an [Guy holding popcorn in the theater]
anthem for how we select politicians in this country but we digress when you
average down you thought you were oh so clever in paying eighty two dollars a
share for slip and slide roof shingles sounded like a real winner at the time
well the stock could hit par or a hundred bucks a share and not really par [Guy sliding on some roof tiles in the rain]
but it just sounds cool when equity investors call out par for an equity so
the stock was 100 bucks and you believe the brokers you were sure it'd be [Clock ticking by]
two hundred dollars in two years so you bought and then they missed their next
quarter and then their next you still are a big believer in the stock if you [Girl looking unhappy at the newspaper]
weren't you would take your losses but if you had conviction at eighty two
dollars a share well you still have conviction it'll get to $200 soon right
all right so now the stock sits at 47 bucks a share and you buy another [Stock price chart showing the price going down]
hundred shares to add to the hundred you paid eighty two dollars a share for
seven months ago and then they miss another quarter and you buy another
hundred shares now at the bargain basement price of $35 a share well you
bought in three separate tranches each one cheaper than the next the first one
cost you 100 times eighty two bucks or eighty two hundred dollars, nice job
buying there... second tranche cost you 100 times 47 bucks or 47 hundred dollars [Working being written out]
and applying concepts beyond calculus here the third tranche cost you a
hundred times thirty-five dollars or thirty five hundred dollars well what
did you do you averaged down your initial cost from 82 bucks a share to a final
average cost of 82 hundred plus forty seven hundred plus thirty five hundred
divided by three hundred shares you own which is about 54 sixty-seven a share
your dollar cost average then is $54 sixty-seven cents and you should also
note that although the number one reason to average down is because you're a [Guy sat on a roof]
believer in the stock long term, a second more Machiavellian reason at least if
you're a professional money manager is that it looks a whole lot
better when you report to shareholders that you bought in at a lower average
price when eventually it goes up again so nice going there would be Warren B [Stock price going up again on the chart]
let's hope that SNS shingle starts including an inflatable rescue mattress [Boy sliding down the roof]
with every purchase and every quarter they report [Boy flies off the roof, into a tree and then falls to the floor]
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