A common strategy employed by investors is "averaging down," particularly when the price of a stock they own has fallen. This involves buying more shares of the same stock at a lower price to reduce the overall average cost per share. The goal is to break even at a lower price point or to increase potential profits when the stock eventually recovers.
How the Average Down Calculator Works
This calculator helps you determine the new average price per share after making an additional purchase at a lower price. The calculation is based on the total cost of all shares (both existing and newly purchased) divided by the total number of shares owned.
The Formula
The formula used by this calculator is:
New Average Price = (Total Cost of Existing Shares + Total Cost of New Shares) / (Total Existing Shares + Total New Shares)
Where:
Total Cost of Existing Shares = Current Shares Owned × Current Average Price
Total Cost of New Shares = Shares to Buy × Price Per Share (New Purchase)
Total Existing Shares = Current Shares Owned
Total New Shares = Shares to Buy
When to Consider Averaging Down
Averaging down can be a powerful tool, but it requires careful consideration. It's generally advisable to consider this strategy only for stocks where you have strong conviction in the company's long-term prospects, and the price drop is due to temporary market fluctuations rather than fundamental issues with the business. Investing more in a declining company without a solid thesis can lead to further losses.
Example Scenario
Let's say you initially bought 100 shares of a company at an average price of $50.50 per share. The total cost for these shares was $5,050 (100 shares * $50.50).
The stock price has since dropped, and you decide to buy an additional 50 shares at $45.00 per share. The cost for this new purchase is $2,250 (50 shares * $45.00).
Using the calculator:
Current Shares Owned: 100
Current Average Price: 50.50
Shares to Buy: 50
Price Per Share (New Purchase): 45.00
The calculator will determine:
Total Cost of Existing Shares = 100 * 50.50 = $5,050
Total Cost of New Shares = 50 * 45.00 = $2,250
Total Shares = 100 + 50 = 150
Total Investment = $5,050 + $2,250 = $7,300
New Average Price = $7,300 / 150 = $48.67 (approximately)
Your new average price per share has now decreased from $50.50 to $48.67, meaning you would need the stock price to reach $48.67 to break even on your total investment.
function calculateAverageDown() {
var currentShares = parseFloat(document.getElementById("currentShares").value);
var currentAvgPrice = parseFloat(document.getElementById("currentAvgPrice").value);
var sharesToBuy = parseFloat(document.getElementById("sharesToBuy").value);
var buyPrice = parseFloat(document.getElementById("buyPrice").value);
var resultElement = document.getElementById("result");
// Input validation
if (isNaN(currentShares) || currentShares <= 0 ||
isNaN(currentAvgPrice) || currentAvgPrice <= 0 ||
isNaN(sharesToBuy) || sharesToBuy <= 0 ||
isNaN(buyPrice) || buyPrice <= 0) {
resultElement.innerHTML = "Please enter valid positive numbers for all fields.";
resultElement.style.backgroundColor = "#dc3545"; // Red for error
return;
}
var totalCostExisting = currentShares * currentAvgPrice;
var totalCostNew = sharesToBuy * buyPrice;
var totalShares = currentShares + sharesToBuy;
var totalInvestment = totalCostExisting + totalCostNew;
var newAveragePrice = totalInvestment / totalShares;
// Display the result, formatted to 2 decimal places for currency
resultElement.innerHTML = "$" + newAveragePrice.toFixed(2) + " Your New Average Price Per Share";
resultElement.style.backgroundColor = "#28a745"; // Success green
}