The formula
new cost basis = (shares₁ × price₁ + shares₂ × price₂) ÷ (shares₁ + shares₂)
A weighted average. Buying 100 shares at $50 and another 100 at $40 gives a basis of $45. Buying 100 at $50 and 400 at $40 gives $42 — the second purchase dominates because it is four times larger.
Two things happen, and only one is visible
Averaging down does what it promises: the break-even price falls, visibly, on the screen you are already watching.
What happens at the same moment is that the position gets larger. The break-even is nearer and there is more money standing behind it, so every further dollar of decline now costs more than it did before.
Neither effect is hidden. One of them is displayed by your broker in large type and the other is not, and that asymmetry of attention is the whole reason the tactic feels safer than it is.
Cost basis is also a tax number
This is the part that separates stocks from every other asset, and it is why this page is not shared with the crypto version.
The average this calculator returns is your average cost. Whether that is the figure your tax authority uses depends on the lot accounting your broker applies — average cost, FIFO, or specific identification are all in use in different jurisdictions and account types, and they can produce materially different taxable gains on a partial sale.
Two consequences worth knowing before adding:
- Selling part of an averaged position may realise a different gain than the average suggests, depending on which lots the broker disposes of.
- In some jurisdictions, buying back shortly after selling at a loss disallows that loss and adds it to the basis of the new shares instead — the wash-sale rule in the US and its analogues elsewhere.
This is not tax advice, and the rules differ by country. It is a flag: check how your broker tracks lots before assuming the number here is the one the tax form will use.
When it is a plan and when it is a reaction
The honest test is whether the second purchase was decided before the first was placed.
A scaled entry — planned in advance, sized so the full position is the intended risk, with an exit for the whole thing — is a normal technique. The falling average is a side effect rather than the goal.
Buying more because the position is down, with no predetermined limit, produces identical arithmetic and a different risk profile. It is the first step of a martingale, and the position size is being decided by the loss rather than by a rule.
The calculator warns when the addition is more than twice the original, because past that point the basis is set mainly by the new purchase — whatever the intention, this is now a larger, newer trade.