How it works
Average cost = total amount invested ÷ total shares. Buying 100 shares at 10,000 and 100 shares at 8,000 gives (1,000,000 + 800,000) ÷ 200 = 9,000.
Shares needed for a target average
Additional shares = current shares × (current average − target average) ÷ (target average − new buy price). The target must be above the new buy price and below your current average.
Loss versus the gain needed to recover
A stock that falls from 10,000 to 5,000 is down 50%, but it needs a 100% gain to get back. A 30% loss needs about 43%, a 20% loss needs 25%. Averaging down lowers the gain you need, but it also raises the amount tied up in one position.
Decide the plan before you add
Buying on every dip without a plan makes one position dominate the portfolio. Set the maximum you will put into this stock, how many tranches you will use and how far it must fall between them, then use the target-average result inside that plan.
Before averaging down
A lower average does not help if the reason for the decline persists — it only enlarges the position. Set a maximum position size first. Fees and taxes are not included.