How to Calculate Your Average Stock Price After Buying at Different Prices

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If your stock goes down after you buy, one possible strategy is to buy more at a lower price. This is often referred to as averaging down.

For instance, if you purchased 100 shares of a company at ₹500 per share, but the price falls to ₹400, you could decide to buy another 100 shares of the same company.

Now an important question to ask yourself is:

What is your new average buying price?

Understanding your stocks’ average purchase price is important, because that determines how far the price has to rise to break even.

What Is the Average Stock Price?

Your average stock price is the sum of all the prices you’ve paid for a stock.

If you’ve purchased the same stock at different prices and in different amounts, the average stock price allows you to evaluate how much you have to make on the stock, before you make a profit.

The calculation is rather simple:

Average Price = Total Amount Invested ÷ Total Number of Shares

To give you an example here:

First purchase: 100 shares at ₹500

Second purchase: 100 shares at ₹400

Total investment:

₹50,000 + ₹40,000 = ₹90,000

Shares:

100 + 100 = 200

So the average price in this case becomes:

₹90,000 ÷ 200 = ₹450.

Your average buying price becomes ₹450 per share.

How Does Averaging Work?

Your average price moves, whenever you buy more stock at either a higher or lower price than your average stock price.

Purchases, which have a different price than your current average, will change your average.

If you buy more stocks at a lower price than your current average, you will decrease your average stock price.

On the other hand, if you buy more at a higher price than your average stock price, you increase it.

Let’s say your average stock price is ₹500 for 100 shares.

If you now buy another 100 shares at ₹300, your new average stock price becomes:

₹(50,000 + 30,000) ÷ 200 = ₹400.

The new average is ₹400. Hence, the average stock price is reduced.

However, averaging down is certainly not guaranteed to make money.

A stock price can keep dropping, despite buying at a lower price.

The concept works similarly, when you do not buy the same number of shares at every price level.

How to Calculate Average Price With Varying Quantities

We’ll now take a situation where you have purchased different amounts of the same stock, at different prices.

Let’s say the following has happened:

PurchaseSharesPriceInvestment
1st Buy100₹500₹50,000
2nd Buy50₹400₹20,000
3rd Buy150₹300₹45,000
Total300—₹1,15,000

The average price would be:

₹1,15,000 ÷ 300 = ₹383.33.

The average buying price comes to ₹383.33.

That is why the simple approach of just summing up all the prices and dividing by the number of different purchases would give you the wrong result.

The reason is, that you purchased different amounts of the stock at different prices. Hence why the quantity in which you purchased the stock at different price levels matters.

What Does the New Average Price Mean?

Let’s say you have purchased:

100 shares at ₹600

That makes your investment equal to ₹60,000.

The price then drops sharply to ₹400, and you decide to buy more:

Another 100 shares at ₹400

Your total investment becomes ₹1,00,000.

You now own 200 shares of the stock. Hence your average stock price is:

₹1,00,000 ÷ 200 = ₹500.

Instead of needing to watch the stock price rise to ₹600 to recoup your investment, you only need it to rise to approximately ₹500, to break even (ignoring brokerage, taxes and other charges).

Using a Stock Average Calculator

When things get more complicated and you have made many purchases at different levels, calculating the average price can become quite tedious.

That is why there exists a Stock Average Calculator, which can help you determine your average price more easily.

This can be especially useful, when analysing several different averaging scenarios, and you want to know your revised average stock price after a new purchase.

For instance, an investor would be able to answer the following questions:

How many more shares would i need to buy?

What happens, if i buy at a price of ₹350?

At what price would i have to purchase additional shares?

What would my average price be in case of another purchase?

Being able to see these numbers can, to some degree, simplify the entire process, and make it easier to take the right action.

Understanding the Average Stock Price

The most important thing to understand about an average stock price, is the fact, that it is not always an indicator of future performance. Reducing your average purchase price does not necessarily reduce your net loss either.

Say you have bought the following:

100 shares at ₹500.

The stock price then drops to ₹300. So you might decide to buy more.

Now, your shareholding is worth ₹30,000 compared to the initial ₹50,000.

But just buying more shares at the reduced price of ₹300, and waiting for the price to rise, is buying more losses.

Your average cost is now ₹400 (i.e. ₹(50,000 + 30,000) ÷ 200).

But, the share price is still ₹300.

You’ve invested a total of ₹80,000, whilst the value of your 200 shares only amounts to ₹60,000.

You’ve got a net loss, which amounts to ₹20,000.

Hence the lower average stock price still requires the share price to increase before you could break even.

Although, it is true, that a reduced average stock price reduces the amount the price has to go up in order for you to break even.

Should You Always Average Down?

No.

Averaging down is usually avoided for a good reason.

Before averaging down, you need to make sure, that it actually makes sense at the current time.

Make sure to always invest more money in a falling stock, only after you’ve examined why the price is falling.

Ask yourself the following:

Have the company’s earnings dropped sharply?

Has revenue been growing slower than expected?

Has the amount of debt increased?

Has the company’s business perspective changed?

Has the industry been hit by a general downturn?

Was your intial investment wrong?

Has the company’s earnings become more attractive than the fundamentals suggest?

In any such scenario, you’d want to avoid averaging down.

Averaging Down Versus Increased Confidence

There is a massive difference between averaging down, and increasing your position due to confidence in the investment.

I would suggest that a smart investor should only increase his position is his confidence in the potential of his investment increases.

A good example would be:

“The stock has fallen by 20%, therefore, I will buy more.”

verses

“The stock has fallen by 20%. Although, the company’s earnings outlook, balance sheet and long term fundamentals are still intact. Now, the company’s share price looks more attractive. I will buy more.”

In either case, the risk you need to take, and hence the size of your position, are important factors to consider.

The Position Size

One thing that should always be taken into consideration is the size of your overall position.

In other words, if you have initially invested ₹20,000 in a falling stock, averaging down several times could increase the capital, which you put at risk with your investment significantly. From say ₹20,000 to ₹80,000 and finally ₹1,00,000.

The risk involved becomes much greater, if another drop occurs.

Final Thoughts

Being able to calculate your average stock price is essential, if you have purchased the same number.

The calculation is rather simple:

Average Price = Total Amount Invested ÷ Total Number of Shares

However the actual investment decision is far more important.

The average stock price will change the amount, at which you break even.

But it is far from a guarantee for profits.

So before making a new investment, the fundamentals, outlook, valuation and overall risk for the business should always be taken into consideration. Whereas a stock average calculator will help with the numbers, the research will guide your investment.