What does it mean to average down?

Averaging down means buying more shares of a stock you own at a lower price than your original purchase. This reduces your average cost per share. Example: You buy 100 shares at $50 ($5,000). Stock drops to $30. You buy 100 more shares ($3,000). Your new average cost is $40 per share ($8,000 ÷ 200 shares). Stock needs to reach $40, not $50, for you to break even.

Is averaging down a good strategy?

Averaging down can be smart if: the company's fundamentals remain strong, the decline was market-wide or temporary, and you have conviction in recovery. It's risky if: the company is fundamentally broken, you're 'chasing losses', or you're over-concentrated in one stock. Never average down on speculation or without new analysis. Many investors average down into value traps, deepening losses.

When should I NOT average down?

Don't average down if: company fundamentals deteriorated, you're already over-concentrated (violating diversification), you're emotionally attached rather than analytical, it would significantly increase your risk, or you're trying to 'get back to even'. Sometimes cutting losses is correct. Averaging down on declining companies (Sears, Blockbuster, etc.) multiplied losses for investors.

How much should I buy when averaging down?

Common approaches: 1) Buy equal dollar amounts (dollar-cost averaging), 2) Buy equal share amounts, 3) Buy progressively larger amounts as price falls (pyramid approach), or 4) Buy once at significantly lower price. Set predetermined price targets and amounts before the stock falls. Never over-commit—maintain overall portfolio diversification and risk limits.

What's the difference between averaging down and catching a falling knife?

'Catching a falling knife' means buying a rapidly declining stock hoping it bounces—usually driven by emotion and hope. Averaging down is strategic: you buy quality companies at better prices with conviction based on analysis. The key is: falling price alone doesn't make a stock a good buy. Focus on value, not just price decline.