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Finance: What is Average Down? 8 Views


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Description:

What is Average Down, or Dollar Cost Averaging? Average down just means that an investor has bought more shares of a stock at a lower price than what they originally bought at. By doing this, their average share cost is lower. It’s more of a feel-good strategy than anything else, as the whole point is just to lower the average share cost (looks like the investor got a discount).

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Transcript

00:00

Finance, a la shmoop what is average down or dollar cost averaging well remember the

00:09

movie Black Hawk Down, Navy SEALs who were shot down in Somalia then bravely [Solider shooting a rifle]

00:14

shot their way to safety until they ran out of bullets yeah [Guy looks upset that he's out of ammo]

00:17

well that has nothing to do with average down although you'd think it was an [Guy holding popcorn in the theater]

00:20

anthem for how we select politicians in this country but we digress when you

00:25

average down you thought you were oh so clever in paying eighty two dollars a

00:30

share for slip and slide roof shingles sounded like a real winner at the time

00:34

well the stock could hit par or a hundred bucks a share and not really par [Guy sliding on some roof tiles in the rain]

00:38

but it just sounds cool when equity investors call out par for an equity so

00:43

the stock was 100 bucks and you believe the brokers you were sure it'd be [Clock ticking by]

00:47

two hundred dollars in two years so you bought and then they missed their next

00:51

quarter and then their next you still are a big believer in the stock if you [Girl looking unhappy at the newspaper]

00:56

weren't you would take your losses but if you had conviction at eighty two

00:59

dollars a share well you still have conviction it'll get to $200 soon right

01:04

all right so now the stock sits at 47 bucks a share and you buy another [Stock price chart showing the price going down]

01:08

hundred shares to add to the hundred you paid eighty two dollars a share for

01:12

seven months ago and then they miss another quarter and you buy another

01:15

hundred shares now at the bargain basement price of $35 a share well you

01:20

bought in three separate tranches each one cheaper than the next the first one

01:25

cost you 100 times eighty two bucks or eighty two hundred dollars, nice job

01:28

buying there... second tranche cost you 100 times 47 bucks or 47 hundred dollars [Working being written out]

01:34

and applying concepts beyond calculus here the third tranche cost you a

01:38

hundred times thirty-five dollars or thirty five hundred dollars well what

01:41

did you do you averaged down your initial cost from 82 bucks a share to a final

01:46

average cost of 82 hundred plus forty seven hundred plus thirty five hundred

01:50

divided by three hundred shares you own which is about 54 sixty-seven a share

01:55

your dollar cost average then is $54 sixty-seven cents and you should also

02:03

note that although the number one reason to average down is because you're a [Guy sat on a roof]

02:06

believer in the stock long term, a second more Machiavellian reason at least if

02:11

you're a professional money manager is that it looks a whole lot

02:14

better when you report to shareholders that you bought in at a lower average

02:18

price when eventually it goes up again so nice going there would be Warren B [Stock price going up again on the chart]

02:22

let's hope that SNS shingle starts including an inflatable rescue mattress [Boy sliding down the roof]

02:27

with every purchase and every quarter they report [Boy flies off the roof, into a tree and then falls to the floor]

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