| If you are a long-term investor in stocks, there is | | | | you continue to buy stock at different prices for |
| a very exciting investment plan. It is most suitable | | | | six months. |
| plan both for the beginners and veterans in stock | | | | Suppose you buy 100 shares in the first month @ |
| market investments. Most of the investors, | | | | $30, second month@ $40, third month @ $50, |
| whether new or old, are constantly haunted by | | | | fourth month @ $90, fifth month @ $ 60 and in |
| just one fear: As soon as you start investing in | | | | sixth month @ $30. |
| the stock market, the price of your stock will | | | | Suppose your total investment over six months |
| tumble and it will spiral up the moment you sell | | | | comes to be $ 30,000 and you buy 600 shares. |
| out your shares most probably, at a loss. | | | | Your average cost price per share would be $50. |
| This is not just a phobia, an imagined fear. It is a | | | | Now suppose you buy your stock on the basis of |
| very real cause to worry especially if you are | | | | dollar cost averaging. According to it, you spend |
| trying to catch moves or time of the markets. | | | | the same amount that is, $ 30,000 spread over a |
| Not only the lay investors, even the professional | | | | period of six months so that you spend $5000 |
| traders and fund managers also have a hard time | | | | every month. Let us say you invest the same |
| gauging the wayward, volatile and unpredictable | | | | amount every month and buy 166.66 shares@ |
| market moves. Since you are a long-term | | | | $30 in the first month, 125 shares @ $ 40 in the |
| investor, you do not want to play this type of | | | | second month, 100 shares @ $50 in the third |
| guessing game with your hard earned money. | | | | month, 55.55 shares @$90 in the fourth month, |
| You want to be on a surer footing. You, | | | | 83.33 shares @ $60 in the fifth month and 166.66 |
| therefore, want a strategy that is proven, | | | | shares @ $ 30 in the sixth month. You buy a |
| conservative and delivers good value on your | | | | total of 697.2 shares for $30,000. If you divide |
| investment over the long run. This strategy is | | | | $30,000 by 697.2, your average cost per shares |
| called Dollar Cost Investing. | | | | comes to $43.02. |
| This type of investment works on the premise | | | | It is obvious that you have invested in fractional |
| that if you buy the stocks of the same dollar | | | | shares in the second investment plan. Your saving |
| amounts on regular basis, the unpredictable | | | | per share is huge although you are investing the |
| fluctuations in investment is squared off over a | | | | same dollar amounts but buying shares fractionally. |
| certain period of time. You basically buy more | | | | You actually buy more shares when the price is |
| stock when the prices are low and buy less when | | | | low and less shares when the price is high. You |
| the market is high since you are always investing | | | | not only wind up with more shares, almost 700, |
| the same dollar amount. You do not have to | | | | at much less average price of $43 as against $50 |
| worry about buying the shares on higher costs | | | | in the first instance. |
| and selling them on low. This happens because the | | | | It must, however, be noted that it is much easier |
| risk of the timing is reduced. All you need to do is | | | | to make such purchases in a rising market when |
| to consistently invest the same dollar amount on | | | | your investment appreciates. You have to be |
| regular basis. If you purchase index funds, your | | | | pretty much disciplined and stick to your strategy |
| investment will grow with the market. Obviously | | | | when the market is falling. You must also be |
| you are more in tune with the market over the | | | | aware of that each dollar buys more in a falling |
| long term. | | | | market, which potentially leads to higher gains in |
| This plan can be illustrated by an example. | | | | the future as the market recovers. |
| Suppose you are not investing on the principle of | | | | Although it is impossible to predict the market |
| dollar cost averaging. Instead, you are buying the | | | | trends in the future, but historically, the market |
| same amounts of shares every month. You buy, | | | | has risen over the long term and it takes the |
| say, 100 shares on the 15th of every month and | | | | conservative investors right along with it. |