Average Cost

Average cost is the mean price you paid when buying the same asset in several purchases. Divide total money invested by total shares held. Buy 10 shares at $50 and 10 more at $30, and $800 for 20 shares gives an average cost of $40.

It is useful because it sets the break-even line. Above your average cost you are in profit; below it you are at a loss. After many buys and sells, that single number tells you where you actually stand.

The common trap is averaging down. Buying more of a falling stock lowers your average cost and shrinks the loss percentage on screen, but you have not recovered any money. Your average cost fell while the amount committed to that position rose, so a recovery pays more and a further fall hurts more. A lower average cost is, by itself, neither good news nor bad.

So judge the company, not your average cost. The right question is whether you would buy this stock at today's price if you were seeing it for the first time. Deciding to sell only once the price returns to your average is anchoring on money already spent. Regular fixed-amount investing works not because it lowers your average cost but because it removes the need to judge timing at all.