The number is simple, but judging by it goes wrong often.
Average purchase cost is the total spent divided by the quantity held. It weights by amount rather than by number of purchases, so a price bought in size counts more. Even across three purchases, putting most of the money in on the last one pulls the average toward that last price.
How a price moves from here has nothing to do with what you paid. The market does not know your entry. Yet people treat their average as a line, feeling gain above it and loss below, and that feeling governs the decision. Whether to buy this asset now and whether to sell what you already hold should be the same question, and average cost splits them apart.
Buying more of a position that fell lowers the average. The number falling feels like improvement, but what actually happened is that more money went into that position. Recovery now pays more, and a further fall costs more. Lowering the average is not itself a gain; it is closer to increasing the risk.
The percentage lost and the percentage needed to recover are not the same. A 50% fall requires a 100% rise to return to the starting point. That asymmetry makes large losses sharply harder to undo. It is both why lowering the average looks attractive and why the growing amount makes it dangerous.
Forgetting the average and asking 'would I buy this amount at this price now' simplifies the decision. If the answer is no, the average provides little reason to keep holding. This explains the calculation and a common illusion; it does not address any particular stock or moment.
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