How to Calculate Your Average Cost After Averaging Down
Averaging down means buying more shares of a stock you already own after its price has fallen below what you paid. The goal is a lower average cost per share. Working out that new average takes one formula, and it is worth doing by hand once so the numbers from any calculator make sense.
The formula
New average = (old average × shares owned + buy price × new shares) ÷ (shares owned + new shares)The top of the fraction is the total amount you have paid for the position. The bottom is the total number of shares. Your average cost is simply total dollars divided by total shares, so each purchase counts in proportion to how many shares it added. The new average equals the plain midpoint of the two prices only when both purchases are the same size.
A worked example
Say you own 40 shares bought at $120, so you have paid $4,800. The stock now trades at $90. Here is what different purchase sizes do (commissions ignored):
| Shares added | Cost of new shares | Total paid | Total shares | New average | Change |
|---|---|---|---|---|---|
| 0 | $0 | $4,800 | 40 | $120.00 | 0.00% |
| 10 | $900 | $5,700 | 50 | $114.00 | -5.00% |
| 20 | $1,800 | $6,600 | 60 | $110.00 | -8.33% |
| 40 | $3,600 | $8,400 | 80 | $105.00 | -12.50% |
Take the last row: ($4,800 + $3,600) ÷ 80 = $105.00. Doubling the position at $90 lands exactly halfway between $120 and $90 because the two lots are the same size.
What the table shows
- The average never reaches the current price. It moves toward $90 but stays above it no matter how many shares you add at $90.
- Each extra share does less. Adding 10 shares cuts the average by $6; adding 40 cuts it by $15, not $24.
- The paper loss does not shrink. At $90, the loss is $1,200 before and after buying. The new shares were bought at the market price, so they start at zero gain or loss.
- The break-even move gets smaller. From $90, the stock needs to rise about 33.33% to reach $120, but only about 16.67% to reach $105. The trade-off is that $8,400 is now riding on the stock instead of $4,800.
Adding commissions
Most large US brokers charge $0 commission on online trades of US-listed stocks, in which case the formula above is the whole story. If you pay a percentage commission, for example the 0.25% that many non-US brokers charge for US shares, the calculator multiplies total cost by (1 + commission rate) and shows that separately as “average incl. fees.” In the 40-share example, $8,400 × 1.0025 = $8,421, and $8,421 ÷ 80 = $105.2625. The sell side is covered in the fees and taxes guide.
Common mistakes
- Averaging the two prices. ($120 + $90) ÷ 2 = $105 is right only for equal-sized lots. With 10 added shares the real average is $114.
- Expecting your tax cost basis to be one number. Your broker may display an average, but for individual stocks the IRS generally tracks each purchase as a separate tax lot with its own cost and holding period. The average is useful for planning; your 1099-B reports lots.
- Thinking a partial sale changes the average. On a simple average-cost display, selling some shares leaves the remaining average unchanged; it only realizes a gain or loss.