What is an average down calculator?

An average down calculator can help you determine whether it's worth it to buy more shares of a stock that has fallen in value. When you buy shares at a lower price, then that lowers the cost of your holdings. That can make it easier to turn a profit on it if the stock rallies.

For instance, if you invested $1,000 into a company and that allowed you to own 100 shares, then your average purchase price would have been $10 per share. Now, if the stock were to go on to decline to $5 per share, you could buy more shares to bring your average down.

Let's say in Scenario A, you invest another $1,000. At $5, you would be able to buy another 200 shares. At that point, you would own 300 shares while having invested a total of $2,000. Your will now be $6.67 per share. And the more shares you buy at the reduced price, the lower you can bring down your average. Let's take a look at another scenario.

In Scenario B, let's say you invested $3,000. At that level of investment, you could be an additional 600 shares of the company Then, you would have 700 shares for a total investment of $4,000 -- bringing your average down to $5.71. That's slightly lower than the $6.67 in Scenario A if you did the smaller investment.

How does this average down calculator work?

Regardless of how many prior purchases you have made, all you need to do for this calculator is enter the total value of your investment in a stock, and how many shares you own of it. This calculator will then tell you what your average cost is.

Then, you can enter the current stock price. Next, what the calculator will do is tell you how low you can get your average by buying at different increments of $1,000 (assuming you buy at the current stock price). This can help you determine if it makes sense (e.g. doesn't cost a whole lot) to get your average down. The goal here is for you to be able to input the current price as it stands today to see whether it makes sense executing on a trade or not.

However, you can also do what-if scenarios on different price points. Although you may not want to buy at today's price, you can input a lower price to see if it's worth buying the stock if it falls even further. That way, you can be ready to make a trade if it hits that price.

When should you average down?

Whether you average down or not ultimately depends on your risk tolerance and the hopes you have for an investment. If you believe the stock is significantly undervalued and due to recover, then averaging down can make a lot of sense; you're effectively adjusting your investment's cost down so that it's cheaper and easier to turn a profit on it down the road.

However, by averaging down, you are also investing more money into a single stock. The danger here is now you become less diversified and that can put you at greater risk because you become more dependent on the performance of that individual stock.

It's important to evaluate both factors when making a decision of whether to average down or not. But if it's a quality investment and you're comfortable with the level of risk, it could be a good move. The average down calculator can help you make that determination.

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