If I buy stock?

Are you asking this question as a trader or as an investor? What is your time frame?

There are several special situations where you can justify averaging down. Dollar-cost-averaging is one. If you plan to hold the stock for 10 years as a long-term investor, if this is part of your plan, then so be it.

As a trader, nobody in their right mind WANTS a 50% loss on the first trade or to begin.

No trade plan I've ever seen allows for a 50% loss. Most traders set a stop at 7% - 15% initially, depending on volatility. From a trading perspective, it's stupid to lose half of your money, ever. You would then have to double your money, just to get back to even. Do you realize how long it takes to double your money, if that is even possible? This is not a good plan.

You can "if" this and "probably" that, and "when" this happens or whatever, your fantasy example falls apart, is a disgusting loss, yet through some feat of false or twisted thinking you seem to think a 50% loss is a good thing. If you buy more and average down, and the stock continues falling, losses will be even greater. If you want to stay in the game, you must protect your initial capital. Most big traders never take a loss of more than 2% or 3% maximum. They can take many small losses and stay in the game for when the market goes their way. As a beginner, you are still focusing on mythological profits you have no potential to make.

A successful investor/trader focuses on risk as the "a priori." You are trying to justify averaging down as a means of reducing cost basis (a decrease of the average price). This is what we do when we sell a call against our long position, but not only does it reduce cost basis, it also reduces risk AND deleverages our position. You are doing the opposite. You are INCREASING your risk by a factor of five, and leveraged up (not down) beyond anything sensible. You are gambling, not investing. You're letting everything ride on one trade, setting yourself up to get wiped out completely. Never, ever, do that. It's called "gambler's ruin," tested, proven. Never risk it all. Reduce risk instead. There is no such thing as "making money backwards." Your thinking is "backwards."

Test a real live example and get back with us on how that worked out. But first, you need a plan that includes good trading strategy and a liquid stock with good volume, probably one greater than $5 a share, and not some illiquid pump and dump penny stock that's about to go out of business.

Sometimes averaging down is a good strategy, other times it's better to sell off a beaten down stock rather than buying more shares. You're guessing. Not a good plan. In most cases, you don’t know enough about the underlying company to determine if a drop in price is temporary or a reflection of a serious problem.

Your best course of action when investing in a stock (as opposed to a company long term) is to cut your losses at no more than 7%. When the stock drops that much, sell and move on to the next deal.

http://stocks.about.com/od/advancedtrading/a/Avedw...

One thing you should learn about investing/trading is that you NEVER average down.

So buying more shares DOESNOT put in you a better position, what happens when the stock goes lower - how much money do you have to keep throwing good money after bad

Christ. You are changing your average cost to about $2.91 per share. You are still minus $2,500 for the initial 1000 shares and even on the 5,000 share trade. Does it mean you'll make money? Obviously not. What if the stock falls to $2.00? Ponder this before you think about investing.

No.

You invested $17,500.00. ($5000 on the 1st purchase + $12,500 on the 2nd purchase.)

The 6000 shares you now own is worth $15,000.00.

So you have an unrealized loss of $2,500.00. The same as before you made the 2nd purchase.

The stock needs to rise to $2.92 before you break even.

When you have a losing trade, buying more NEVER turns it into a winner.

Buy stocks, you need the assistance of a stockbroker who is licensed to purchase securities on your behalf.

Buying and Selling time two parties(buyer and seller) between broker involved .It person buying, selling transaction completed time recevied (both) particular commission.

Unless it goes back up to $5 then you've lost money.

If you feel that no further reduction in the rate will be there, it is advisable to buy more and averaging the price.

No. You lost money.