It’s finally the perfect time in your life to purchase shares of your very first stock – Carpe Diem, Seize The Day – am I right? The only concern that you may have is…..when? You may hear of wall street gurus who are constantly “timing the market” since “time is money” after all. But this is simply a superstition and is used to feed on the fear of the feeble-minded. There are ways to get around this and in this lesson, I will be sharing with you the dollar cost averaging investment strategy – a strategy used by MILLIONS of people each and every day – that takes out all the guesswork and eradicate your sudden case of F.O.M.O. (Fear Of Missing Out).
But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.
Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.
Guess Free Stock Buying
Many investors worry about placing trades in the stock market, because it’s tough to know when to actually place a trade. Buy low and sell high is a common mantra, but how do you know when the highs or lows will occur?
The good news is that you don’t have to time the market. Dollar cost averaging is a strategy that many investors can use to take the guesswork out of entering the market.
This is done by buying a few shares of stock, mutual fund, or other investment on a regular basis.
For example, lets suppose an investor wants to purchase shares of XYZ stock, but doesn’t know when to get in. So they decide to buy using dollar cost averaging, where they buy a few shares this month and then a few more on the same date the next month, and so forth.
Let’s look at a hypothetical scenario of how this would pan out. Suppose XYZ is currently trading for $21 a share. Our investor decides they would invest $100 every month. So in their first month, they were able to buy 4.7 shares. The next month the stock price fell to $20 a share, and they were now able to purchase 5 shares. In the third month, the stock had rallied to $22 a share, and was able to purchase 4.5 shares. Month four, 4.3 shares of $23. Month five, 5
shares at $20. Month six, 4.7 shares for $21.
Our investor has now invested $600, and picked up 28.2 shares of stock, with an average cost of a mere $21.28.
If they had invested that $600 in one lump sum, they may have been lucky enough to get in at a low of $20, or a little less lucky at $23 a share.
The good news is that by dollar cost averaging, our investor did get a relatively good price for their shares.
While our investor has been in the market the last six months, they were happy to find small paychecks showing up at their house every quarter. These small paychecks, or dividends, from the company consisted of $0.10 per share.
While they are happy they are getting paid, they know that if they decide to reinvest this amount, their rate of return may increase because of compounding returns.
To do this, they must talk with their broker to set up a dividend reinvestment plan, commonly known as DRIP. A
DRIP program is just like dollar cost averaging, except it uses the securities dividends to purchase more shares.
Our investor now has 28.2 shares, and each share pays $0.10 – which means instead of receiving a check for $2.80 as a dividend payment, it will be reinvested to buy even more shares.
This small amount may only cover a fraction of the shares cost, but the dividend reinvestment along with the dollar cost averaging plan overtime could allow them to build up their portfolio.
So each month, our investor invests $100 using dollar cost averaging, and each quarter, their dividends are reinvested because they set up a dividend reinvestment plan.
Our investor is happy now because they don’t have to time the market, and decide if this is the best time to enter each trade. And they are now able to buy even more shares because their dividend payout is being reinvested, getting them even more shares, and in turn, possibly a bigger dividend payout the next quarter.
Keep in mind that this is only a hypothetical position – the amount that you choose is ultimately due to you as everybody’s financial circumstances are different. You should also note that results can vary – as they’re risk to be involved when investing.
Dollar Cost Averaging
- Dollar cost averaging is a strategy that many investors can use to take the guesswork out of entering the market. This is done by buying a few shares of stock, mutual fund, or other investment on a regular basis
- The good news is that by dollar cost averaging, an investor can get a relatively good price for their shares
- You could also decide to reinvest your dividends. To do this, they must talk with their broker to set up a dividend reinvestment plan, commonly known as DRIP
- A DRIP program is just like dollar cost averaging, except it uses the securities dividends to purchase more shares
- Some investors choose to utilize dividend reinvestment along with the dollar cost averaging plan – which overtime could allow you to build up your portfolio
- Has the advantage of not having to constantly time the market
And that’s dollar cost averaging in its entirety. The goal of dollar cost averaging is to invest a set amount of money every month into buying more shares of stocks – this allows the money to gradually increase through the power of compound interest – as this will be able to build up the value of your portfolio over time.
Investing too much capital all at once could be potentially risky since market conditions could allow the value of your investment to deteriorate due to a lack of diversification, asset allocation, and the use of proper position sizing. There is also the chance that if you were to buy the shares of stocks all at once, you may miss out on an opportunity to purchase the same amount of shares at a cheaper price. It is important to take these considerations into account when purchasing financial assets – as they will save you both time and money.
I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.