Adding to a Position and Average Cost
If you buy in several rounds at different prices, what did you really pay? Your average cost decides when you break even.
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Text version · Stock Basics, lesson 9: “Adding to a Position and Average Cost”
If you buy in several rounds at different prices, what did you really pay? Your average cost decides when you break even.
Average cost = total spent ÷ total shares
After buying in several rounds, your average cost per share is your breakeven price: you're up overall only when the price is above it.
Buy more lower down to bring your cost down
Buy again below your average cost and the average cost line moves down, making it easier to break even, but you've also put in more money.
Weighted by shares, not a simple average
100 shares at $20 and 300 shares at $10: total spent $5,000 ÷ 400 shares = $12.50, not (20 + 10) ÷ 2 = $15. The bigger purchase has more pull on your average cost.
Key takeaways
- Average cost = total spent ÷ total shares. It's weighted by shares, not a simple average of the buy prices.
- Adding shares below your average cost pulls it down; adding above it pushes it up.
- You're in profit overall only when the current price is above your average cost.
- Averaging down means putting in more money and concentrating your bet, so losses grow bigger if the price keeps falling.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click "Example": 100 shares at $20 + 100 shares at $10. What's the average cost?
- Keep playing until the price is around $14: with an average cost of $15, are you up or down overall?
- Clear the position, buy once near $20, then add twice near $11 and see how far the amber average cost line moves.
- Try adding again once the price recovers above $17: is the average cost pulled down or pushed up?
Quiz and explanations
- 1. You buy 100 shares at $10, then 100 more at $20. What's your average cost?
- Answer: $15.Total spent $3,000 ÷ 200 shares = $15.
- 2. Your average cost is $15 and the price is $14. Overall you're…
- Answer: At a loss.The price is below your average cost, so you have an unrealized loss overall.
- 3. You buy 100 shares at $20, then 300 more at $10. What's your average cost?
- Answer: $12.50.Total spent $2,000 + $3,000 = $5,000 over 400 shares, so the average cost is $12.50. The bigger purchase carries more weight, so it isn't (20 + 10) ÷ 2.
Terms in this lesson
- average cost (Average Cost): Your average purchase price per share after several buys; it's also your breakeven price.
- unrealized P&L (Unrealized P&L): The on-paper profit or loss at today's price on shares you haven't sold yet; it moves as the price moves.