Purchasing Stocks Through Dollar-Cost Average
Everyone always wants to buy stocks, or any securities such as Mutual Funds; or Bonds, at their lowest point and sell at its highest point. Guess What? It is impossible on a consistent basis! In our section Trading Stocks & Types Of Orders we discussed the general principals of how to buy and sell stocks. One way to avoid timing issues and being able to buy more shares when prices are low is called Dollar-Cost Average. This is a proven strategy for long term investors.- Dollar-Cost Average: With dollar cost averaging you invest a fixed amount at fixed intervals of time into the same security. You end up paying an average price that is lower than the average price of the security, since you are purchasing more shares when the price is less.
Example: Every month you decide to invest $100 in High Five Company.
| 1st month: | The stock is $10.00 | your $100 buys you | 10 shares |
| 2nd month: | The stock is $12.50 | your $100 buys you | 8 shares |
| 3nd month: | The Stock is $ 5.00 | your $100 buys you | 20 shares |
| 4nd month: | The Stock is $10.00 | your $100 buys you | 10 shares |
| 5nd month: | The Stock is $20.00 | your $100 buys you | 5 shares |
| 6nd month: | The Stock is $10.00 | your $100 buys you | 10 shares |
| Total 6 Months | You Invested | $600 | 63 shares |
Your Average Purchase Price ($600 ÷ 63) = $ 9.54
The Average Price of the Fund for 6 months = $11.25
If you paid the $600 in the first month, you would only have
received 60 shares vs. the 63 you would earn with dollar cost averaging.
Things to Note:
- Dollar-Cost Averaging does not include commissions. Many use this for purchasing no-load funds Mutual Funds .
- Dollar-Cost Averaging does not take into consideration inflation; you might have to adjust your investment if it is over years, vs. months.
