DOLLAR COST AVERAGING INVESTING BASICS INTEREST HOW IT WORKS INFORMATION STRATEGY FUNDS BEGINNING PRINCIPLES INVESTOR 101 LEARNING INVESTMENT PERSONAL FINANCE GUIDE ADVICE FREE EDUCATION ARTICLE
Learn
about the investing strategy of dollar cost averaging.
DOLLAR COST
AVERAGING
What is dollar cost
averaging?
When an investor buys
the same stock or mutual fund at regular intervals and with
a fixed amount, he or she is said to be using the dollar cost
averaging method. If the market price of the selected
stock or mutual fund declines, the investor will buy a greater
number of shares.
On the other hand, when
the market price of the selected stock or mutual fund
increases, the investor will buy lesser number of shares.
This investing strategy will, over a period of time, result
in the investor buying the selected stock or mutual fund at
an average cost per share that will be less than the average
price per share.
DOLLAR
COST AVERAGING EXAMPLE
Example Assume that a
person invests $100 per month for 12 months in Sun mutual
fund:
Month
Dollars
Price per
No. of shares
Invested
share
purchased
January
100
12.76
7.84
February
100
13.25
7.55
March
100
15.25
6.56
April
100
18.76
5.33
May
100
20.26
4.94
June
100
18.85
5.31
July
100
15.62
6.40
August
100
17.85
5.60
September
100
16.62
6.02
October
100
13.26
7.54
November
100
14.5
6.90
December
100
16.76
5.97
Total
1,200
193.74
75.94
Average price per share = 193.74/12 = $ 16.15
Average cost per share = 1,200/75.94 = $ 15.80
As you can see from the
above table, the average cost per share is lower than the
average price per share.
Benefits of dollar cost
averaging
1) It encourages
automatic savings by permitting systematic
contributions to an investment portfolio. You can
agree with the fund to withdraw funds periodically
from your bank account and invest it in the fund
automatically.
2) You can reduce some
of the risk that poor timing and potentially adverse price
fluctuations will have on your investment decisions.
Drawbacks of dollar cost
averaging
1) Dollar cost
averaging will not protect you in a steadily declining
market.
2) If you discontinue
with a dollar cost averaging plan, you will lose money when
the market value is less than cost of the shares.
For teaching and learning about investing:
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by Dollar Cost Averaging for Stocks and Mutual Funds
Learn
about the investing strategy of dollar cost averaging.
To teach and learn more money skills, personal finance, and money management, please go to the