Legal Definitions - averaging down

Averaging down is an investment strategy where an investor buys more shares of a company at a lower price than their initial purchase, in order to lower the average cost of their investment.

For example, let's say an investor buys 100 shares of XYZ company at $50 per share. The stock price then drops to $40 per share, and the investor decides to buy another 100 shares. By doing so, the investor's average cost per share is now $45, which is lower than their initial purchase price of $50.

Another example could be an investor who buys 500 shares of ABC company at $20 per share. The stock price then drops to $10 per share, and the investor decides to buy another 500 shares. By doing so, the investor's average cost per share is now $15, which is lower than their initial purchase price of $20.

Averaging down can be a risky strategy, as it assumes that the stock price will eventually rebound. However, if the company's financials are strong and the stock price does eventually recover, the investor can potentially make a profit.