Definition
Averaging Down
Averaging down is buying more of a stock as its price falls, lowering your average purchase cost.
If you bought at ₹100 and buy more at ₹80, your average cost drops, so a smaller rebound is needed to break even. For value investors convinced of a stock's worth, averaging down into quality at lower prices can be powerful, the essence of buying with a margin of safety.
The danger is averaging into a deteriorating business ('catching a falling knife'), where the price keeps falling for good reason. The key distinction is whether the fall is a temporary mispricing or a sign of genuine, lasting trouble.
Related terms
- Value InvestingValue investing is a style of buying stocks that trade below their intrinsic worth, betting the market will eventually recognise their true value.
- Pyramiding (Averaging Up)Pyramiding is adding to a winning position as the price rises, scaling up exposure while the trend confirms your view.
- Rupee Cost AveragingRupee cost averaging is the practice of investing a fixed amount at regular intervals, so you automatically buy more units when prices are low and fewer when prices are high.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.