Averaging Down

The arithmetic is the whole of it. Somebody who bought a hundred shares at $50 and buys another hundred at $30 has paid $8,000 for two hundred shares, so the average cost per share is $40 rather than $50. The phrase names that calculation and nothing else.

What the lower average changes is the price at which the position breaks even. What it does not change is anything about the company, and those two are easy to run together because only one of them is printed on the screen. The second purchase is a new decision about the business, made at a new price, and the average is the result rather than the reason.

The phrase is argued over because the same action looks different depending on why the price fell. Investors who use it argue that a lower price on a business whose story has not changed is what the research was for. Investors who avoid it argue that a falling price often reflects news the market has already read, and that adding on price alone skips the question of what changed.