“Average down” is an investment strategy where an investor buys more shares of a stock as the price goes down. This has the effect of lowering the average price that the investor paid for the shares.
For instance, let’s say an investor buys 100 shares of a company at $10 each. If the price drops to $5, the investor might buy an additional 100 shares. The average cost of the shares is now $7.50, even though the current price is only $5.
The strategy is often used by investors who believe that the price drop is temporary and that the price will eventually rebound. By averaging down, they aim to benefit more from the rebound because they own more shares at a lower average cost.
However, it’s also a strategy that carries considerable risk. If the stock’s price continues to fall or never rebounds, the investor stands to lose more money. In other words, it can lead to “throwing good money after bad.” Therefore, it’s critical to apply this strategy in the context of a well-reasoned belief in the stock’s long-term potential.