ShmoopTube

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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