Waterfall Calculation: Understanding it Step by Step

Hello, everyone. Today, we're going to talk about the "Waterfall Calculus", which may seem a bit complicated at first, but if you follow along with me step by step, you'll realize that it's not that hard to understand. So, let's get started, shall we?

What is the Waterfall Calculus?

The waterfall calculation is a common calculation used in investments such as stocks and cryptocurrencies. When investors buy additional shares of a stock or cryptocurrency in order to lower the average purchase price of the shares they own, this is known as "watering down." The watering-down calculation is a way to calculate how much the average purchase price can be lowered by these additional purchases.

How does the arbitrage calculation work?

The principle of the arbitrage calculation is simple. If you buy additional shares at a price lower than the average purchase price of the shares you already own, the average purchase price of all shares will be lower. This way, when the price of a stock drops, you can reduce your losses by lowering your average purchase price.

Example of the waterfall calculation in action

To explain the waterfall calculation in the easiest way possible, let's take a look at a real-world example.

For example, let's say you bought 10 shares of stock A for 1,000 won, which gives you an average purchase price of 1,000 won. But let's say the price of this stock drops to 800 won. What happens if you buy another 10 shares?

The average purchase price of the original 10 shares was 1,000 won, but if you buy 10 more shares at 800 won, the average purchase price of the entire 20 shares will drop to 900 won. This is how you can lower the average purchase price through waterfalling.

Closing thoughts

The waterfall calculation may seem a bit complicated, but it's not that difficult once you understand the principle and apply it through real-world examples. If you're an investor, I hope you'll take advantage of this waterfall calculation and incorporate it into your investment strategy.

Well, that's all for today. Next time, we'll talk about another investment calculation. Thank you.

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