Glossary
Averaging Down
Buying more of a falling stock to lower your average cost
Averaging down means buying more of a holding after it falls, which lowers your average purchase price. Buy at 100, buy again at 60, and your average drops to 80.
A lower average does reduce the rise needed to break even, but it does not reduce the loss itself. It increases your position, so a further fall costs considerably more in absolute money.
One question settles it: if you were seeing this stock for the first time today, would you buy it at this price? If yes, you are adding to a position. If no, you are refusing to accept a loss.
Averaging down is dangerous because prices often fall for a reason. Pouring money into a business whose results are deteriorating only enlarges the damage. Work out whether the drop is the market or the company before you add. Planning from the start to buy in several instalments is scaling in; buying more only because you are down is averaging down. The action can look identical — the presence of a plan is what separates them.