A tool designed to help investors understand the potential impact of purchasing additional shares at a lower price than their current holdings, a strategy known as averaging down, assists in determining the adjusted average cost basis after such a transaction. For example, if an investor holds 100 shares purchased at $50 each and buys another 100 shares at $25 each, this tool calculates the new average price per share.
Averaging down can be a valuable technique for long-term investors. By acquiring more shares at lower prices, the overall cost basis is reduced, potentially leading to greater profits when the stock price eventually recovers. This strategy requires careful consideration of the company’s fundamentals and overall market conditions, as it carries inherent risks if the stock price continues to decline. Understanding the adjusted cost basis helps investors track their investment performance and make informed decisions. This approach has been utilized by investors for decades as a way to manage risk and potentially improve returns in volatile markets.
