For example, let’s suppose that an investor initially paid £110 per share. If the price falls to £100 per share, the investor might choose to buy the same number of shares they initially did in order to average down the price they paid per share to £105. This is achieved by (110 + 100) /2.
An averaging down strategy is most effective for investors and traders who believe that a company will perform well in the long term despite any immediate declines in the value of its stock. However, if the downward trend continues for a sustained period of time, they could find that they incur a greater loss than if they had not employed an averaging down strategy.