What Is Average Cost? How Averaging Down Changes Your Buy Price
Buy a stock in several goes and the price differs each time. Your average cost is what captures the question, on average, what did I pay? It is your average purchase price.
Average cost is the total you have spent divided by the number of shares you own. It is not a plain average of the prices, but a weighted one: each price counts for as many shares as you bought at it.
A worked example
Say you buy 10 shares at $100, then later 10 more at $80. You have spent $1,000 plus $800, or $1,800, for 20 shares.
Divide $1,800 by 20 and your average cost is $90 — right between the two prices. If instead you had added 20 shares at $80, the lower price would carry more weight and the average would fall below $90.
Why averaging down lowers it
Buying more after a price drop to lower your average is often called averaging down. As the number of shares bought at the lower price grows, the average is pulled toward it, so your average cost falls.
| Purchase | Price | Running average |
|---|---|---|
| 1st: 10 sh | $100 | $100 |
| 2nd: 10 sh | $80 | $90 |
| 3rd: 20 sh | $80 | about $86.67 |
As the table shows, the more you buy at the lower price, the lower the average. But a lower average does not erase a loss — you only profit once the price rises above your average.
The trap of averaging down
Keep pouring money into a falling stock just to lower the average, and if it never recovers, the loss only grows. A falling average does not mean the stock itself has improved.
So rather than fixating on lowering the average, first ask whether there is still a reason to invest in that company.
Average cost is the baseline for what you paid on average. Whether today's price is above or below it tells you if you are up or down. If your average gets confusing after several buys, you can work it out by entering just the prices and share counts.