Averaging down is a strategy used by investors to show a larger profit. By buying more shares of a stock that is already owned as the price falls, the average cost paid by the investor falls. Thus, when the price rises again, it does not have to rise as far to realize the same gains. For example, let us say you purchase 100 shares of stock $XYZ at $30 per share. Your average cost is therefore $30. In order to achieve a profit of $1000 on your 100 shares, the value of $XYZ must rise by $10 to $40 per share. Now, let us say you average down when the price of $XYZ falls to $10, by buying an additional 100 shares. Now, your average cost is [$30 per share x 100 shares + $10 per share x 100 shares]/(100 shares + 100 shares) = $20 per share. Now, the price of $XYZ only has to rise by $5 to $25 per share on your 200 shares in order to make $1000 of profit. So, by averaging down, you can achieve a greater profit even when the value of the share is lower than what it was originally! Note: it is important to research the company so that you can be confident that the price will rise eventually, so that you can make that profit. A sharp price fall could be a warning signal that the company is in turmoil.