How does another purchase below my current cost basis change the average price?
Averaging down combines two purchase lots; it does not erase the loss on the first one. The useful question is how many additional units are bought and how the total money invested is spread across the new combined quantity.
Weighting each purchase by quantity
Total cost = (First quantity × First price) + (Second quantity × Second price)New average price = Total cost ÷ (First quantity + Second quantity)Adding a second lot below the first
The default case represents an existing position followed by one additional purchase. The result recalculates the weighted average from the money committed to each lot rather than averaging the two quoted prices.
Illustrative inputs; currency amounts below use USD. Rates and prices are assumptions, not live quotes.
- First buy — shares
- 100
- First buy — price
- $12.21
- Second buy — shares
- 100
- Second buy — price
- $8.40
Step-by-step calculation
- First lot costs 100 × 12.21 = 1,221; second lot costs 100 × 8.4 = 840.
- Combine the lots: total cost 2,061 across 200 units.
- Weighted average = 2,061 ÷ 200 = 10.305 per unit.
Intermediate figures are rounded for reading. Results use the full calculation precision.
How strongly the new buy moves cost basis
The new average should sit between the two purchase prices when both quantities are positive. The larger lot pulls the average closer to its own price, which is why quantity matters as much as the discount.
Capital at risk after averaging down
A lower cost basis does not by itself improve the market value of the position. It increases capital at risk and changes the price required to break even.
- There are exactly two purchase lots in this calculation.
- Both lots refer to the same asset and use the same currency.
- Fees and tax are excluded unless already included in the prices entered.
Calculations related to average down
The following tools examine neighbouring parts of the same calculation without changing the inputs or assumptions used above.
References
Sources and conventions
- SEC Investor.gov: investment costs
Background on costs that can reduce investment returns; the example uses only the fees entered.
Quick answers
Frequently asked questions
Does the second purchase have to be at a lower price?
No. A higher second price will increase the average instead of reducing it.
Are fees included?
No. Enter prices that already reflect any costs if you want to account for fees.
Why is this not a simple average of two prices?
Each price is weighted by its share quantity, so unequal purchases cannot be averaged by adding the prices and dividing by two.
Calculation method and limitations · Report an error
Educational content only. This guide is not financial advice.