As an investor, you want to get the most for your money. You want to get the highest return and pay the least for your investments. This ensures that you get the most for your money.
What is dollar cost averaging?
If you want to make the most money, dollar cost averaging is the way to go. Dollar cost averaging is a very simple principle. You buy stock on a regular basis paying the same amount each time. For example, you invest $500 every month into the stock market. One month you might buy 50 shares, another you might buy 60.
By doing this, you are buying more shares when the price is lower and less when it’s higher. For example, let’s say you put $500 into the same company each month. In month one, the price is $10 per share, so you buy 50 shares. In month two, the price is $9 per share, so you buy approximately 56 shares, 6 shares more than before.
In month three, the price goes down to $9 per share, so you are able to purchase approximately 63 shares. Then in month 4, the price moves up to $11 dollars per share and you purchase approximately 45 shares. Finally, in month 5, the price is $13 per share and you are able to purchase 38 shares.
What have you gained from dollar cost averaging?
By the end of the four months, you have purchased 251 shares for $2,000. At $13 per share, it is worth $3,263. If you had spent all the $2,000 in month one, you would have only been able to have 200 shares now worth $2,600.
Even if you spent all the shares in the third month, you would end up with about the same amount of shares. The reason this works so well is because you are spreading out your risk. When investing, you should always buy low and sell high, but you never really know when it will be at the all-time low or high.
A Good Habit
Investing regularly is not only good to get the benefits of dollar cost averaging, but you can also reap the benefits of continuous the investing. If you only invest sporadically when you can, you are likely to invest less. Investing less means fewer capital gains and less interest earned.