How this instrument works
A stock's average cost per share is not the midpoint between what you paid the first time and what you paid the second — it is a weighted average, where each purchase price counts in proportion to how many shares it bought. Buy the same number of shares each time and the weighted figure does equal the plain midpoint; buy unevenly and it tilts toward whichever purchase moved more shares, because that purchase set more of your actual dollars at that price.
Retail investors run this arithmetic most often after 'averaging down' — adding shares once a price has fallen, which pulls the average cost, and therefore the breakeven point, below the original purchase price. The golden vector on this page is that exact move: $150 for the first hundred shares, $130 for a second hundred after a drop, landing the average at $140 — ten dollars closer to today's price than the first trade alone, without the stock needing to recover all the way back to $150 to reach breakeven.
The number this instrument returns is a per-share average cost, not a broker's official cost basis. Real accounts track each purchase as a separate tax lot, and a sale can be matched to a specific lot, to the oldest lot first, or — for many mutual funds — to a running account-wide average that the IRS permits as an alternative method; commissions, wash-sale adjustments, and reinvested dividends all shift the figure a statement reports away from this simple two-line calculation. Averaging into a stock also says nothing about whether the price will keep falling; a lower average cost reduces the distance back to breakeven, not the odds of getting there.
- Enter the share count and price you paid in Shares, purchase 1 and Price, purchase 1, $.
- Enter the share count and price from the second trade in Shares, purchase 2 and Price, purchase 2, $.
- Read Average cost per share, $ — the single weighted figure both purchases collapse into.
- Change either price to see how much a bigger or smaller second purchase shifts the average toward it.
- Compare the result against today's quote to see how far the position sits from breakeven.
Worked example — averaging down after a price drop
Buy 100 shares at $150, then buy another 100 shares after the price falls to $130. The formula multiplies each purchase by its own share count — (100 × 150) + (100 × 130) = 15,000 + 13,000 = 28,000 — then divides by the total 200 shares held, giving an average cost of exactly $140.00 per share.
That $140 sits ten dollars below the original $150 entry, so the position only needs the stock to climb back to $140, not all the way to $150, before the combined position breaks even. It also sits ten dollars above the $130 second purchase — proof the average is pulled toward whichever trade is larger, and with equal share counts here, it lands exactly halfway between the two prices.
Questions
Why isn't the average just the midpoint of the two prices?
Because the formula weights each price by how many shares it bought, not by how many purchases were made. With equal share counts in both purchases, as in the default example, the weighted average and the simple midpoint happen to match — $140 between $150 and $130. Make one purchase larger than the other and the average shifts toward that larger trade's price instead of sitting at the midpoint.
What is 'averaging down' and what does it actually change?
It means buying more shares of something already owned after its price has fallen, which pulls the average cost, and the breakeven price, down toward the newer, lower price. It lowers how far the stock has to recover before the combined position turns a profit. It does not change whether the price recovers at all; a stock that keeps falling after a second purchase leaves a bigger dollar loss than not averaging down would have, even though the average cost itself is lower.
Does this match the cost basis my broker shows me?
Not necessarily. Brokers track each purchase as its own tax lot and, when you sell, match the sale to a specific lot, the oldest lot first, or an account-wide average — a method the IRS permits for many mutual fund and some brokerage accounts. This calculation is the plain two-purchase weighted average with no lot selection, commissions, or reinvested dividends folded in, so treat it as the arithmetic behind the concept rather than a tax document.
What does this calculation leave out?
Trading commissions, wash-sale rule adjustments, reinvested dividends, and the date each purchase was made — which determines whether a later sale is taxed at short-term or long-term capital gains rates. All of those change a broker's reported cost basis without changing the pure share-weighted average this instrument returns from the two prices and two share counts you enter.
Can I average more than two purchases with this?
The formula extends the same way for any number of purchases — multiply each purchase's shares by its price, sum every purchase, then divide by the total shares. To approximate a third purchase here, treat the two-purchase average and combined share count as a stand-in for purchase 1, then enter the third trade as purchase 2.
Is a lower average cost always the better outcome?
Not automatically. A lower average cost only means less distance to breakeven — it says nothing about whether the underlying business or price trend supports recovering that distance. Averaging down concentrates more money in a position that has already dropped once, so the arithmetic that lowers the breakeven price is the same arithmetic that increases how much is at stake if the price falls further.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.