| Investment
Strategies Dollar Cost Averaging Dollar cost averaging can
give you an investment strategy that evens-out the fluctuations in the price of
an investment made over time. It works by purchasing the same dollar amount of
shares at regular intervals. It is most commonly used to purchase mutual fund
shares on a regular basis. What Is Dollar Cost Averaging? Dollar
cost averaging is the practice of purchasing the same dollar amount of shares
of an investment each period. When the price is up, you buy fewer shares. When
the price is down, you buy more shares. This differs from buying the same
number of shares each time. Imagine instead of dollar cost averaging that you
choose to buy 3 shares on first day of every month for six consecutive months.
Assume the share prices were the following :
| Price/Share | Shares | Cost |
Month1 | $100 | 3 | $300 |
Month2 | $50 | 3 | $150
| Month3 | $25 | 3 | $75 |
Month4 | $20 | 3 | $60 |
Month5 | $25 | 3 | $75 |
Month6 | $50 | 3 | $150 |
| | Total | 18 | $810 |
| | Avg. Price Per Share | | $45 |
By dividing the total amount you paid ($810) by the number of shares
you purchased (18) you find that the average price is $45 per share. Total
value after 6 months:18x$50=$900 =>$900-$810=$90 gain after 6 months
What happens when you invest a set amount of dollars each month. Top
An Example of Dollar Cost Averaging If
you invest $100 a fixed amount of money as the previous example over six months,
you would invest $600 at the and of six months period.You get the following:
| Monthly
Contribution | Shares | Price
per Share | Month1 | $100 | 1 | $100 |
Month2 | $100 | 2 | $50 |
Month3 | $100 | 4 | $25 |
Month4 | $100 | 5 | $20 |
Month5 | $100 | 4 | $25 |
Month6 | $100 | 2 | $50 |
| | Total Contribution | Total
Shares | Avg.Price | | | $600 | 18 | $33.33 |
You purchased 18 shares with your total investment of $600. If you
want to sell at $50 or 1/2 price(remember you bought at $100 in the begining)
Total
value after 6 months:18X$50=$900 => $900-$600=$300 gain after 6
months You can see that when prices are low, you can buy more shares. Conversely,
when prices are high you will buy fewer shares. Thus, when it comes time to receive
dividends, you will have more shares to sell or recieve dividents Top
Formula for Figuring Price Per Share and Cost Per
Share With the following handy formula, you can compare what you would
have paid per share using different investment strategies. . You can determine
your average price per share (what you paid) with this formula:
Average Price = | Total Amount
You Paid | | Numbers of Shares Bought |
As you should recall, using dollar cost averaging the average
price per share was $33.33compared with purchasing the same number of shares
each month which resulted in an average price per share of $45. Dollar
cost averaging gives you an advantage because it helps reduce the average price
you pay. This is true because the Dollar Cost Averaging method takes advantage
of the fluctuation in price. Dollar cost averaging is a simple and straightforward
method of investing. It is often an attractive option for the investor who wants
to systematically contribute to their investment portfolio over time. By electing
to dollar cost average, you can help reduce some of the risk that poor timing
and potentially adverse price fluctuations will have on your investment decisions.
Using the dollar cost average method, it is not as likely that you will purchase
too much of a particular security at a time when it is priced relatively high
in the market. Dollar Cost Averaging does not guarantee a profit or prevent a
loss in declining market.It is important to your ability to continue regular purchases
through different economic conditions.The examples depicts a mathematical model
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