A Proven Risk Free Stock Investment Plan
January 15th, 2008 by admin
If you are a long-term investor in stocks, there is a very exciting investment plan. It is most suitable plan both for the beginners and veterans in stock market investments. Most of the investors, whether new or old, are constantly haunted by just one fear: As soon as you start investing in the stock market, the price of your stock will tumble and it will spiral up the moment you sell out your shares most probably, at a loss.
This is not just a phobia, an imagined fear. It is a very real cause to worry especially if you are trying to catch moves or time of the markets. Not only the lay investors, even the professional traders and fund managers also have a hard time gauging the wayward, volatile and unpredictable market moves. Since you are a long-term investor, you do not want to play this type of guessing game with your hard earned money. You want to be on a surer footing. You, therefore, want a strategy that is proven, conservative and delivers good value on your investment over the long run. This strategy is called Dollar Cost Investing.
This type of investment works on the premise that if you buy the stocks of the same dollar amounts on regular basis, the unpredictable fluctuations in investment is squared off over a certain period of time. You basically buy more stock when the prices are low and buy less when the market is high since you are always investing the same dollar amount. You do not have to worry about buying the shares on higher costs and selling them on low. This happens because the risk of the timing is reduced. All you need to do is to consistently invest the same dollar amount on regular basis. If you purchase index funds, your investment will grow with the market. Obviously you are more in tune with the market over the long term.
This plan can be illustrated by an example. Suppose you are not investing on the principle of dollar cost averaging. Instead, you are buying the same amounts of shares every month. You buy, say, 100 shares on the 15th of every month and you continue to buy stock at different prices for six months.
Suppose you buy 100 shares in the first month @ $30, second month@ $40, third month @ $50, fourth month @ $90, fifth month @ $ 60 and in sixth month @ $30. Suppose your total investment over six months comes to be $ 30,000 and you buy 600 shares. Your average cost price per share would be $50.
Now suppose you buy your stock on the basis of dollar cost averaging. According to it, you spend the same amount that is, $ 30,000 spread over a period of six months so that you spend $5000 every month. Let us say you invest the same amount every month and buy 166.66 shares@ $30 in the first month, 125 shares @ $ 40 in the second month, 100 shares @ $50 in the third month, 55.55 shares @$90 in the fourth month, 83.33 shares @ $60 in the fifth month and 166.66 shares @ $ 30 in the sixth month. You buy a total of 697.2 shares for $30,000. If you divide $30,000 by 697.2, your average cost per shares comes to $43.02.
It is obvious that you have invested in fractional shares in the second investment plan. Your saving per share is huge although you are investing the same dollar amounts but buying shares fractionally. You actually buy more shares when the price is low and less shares when the price is high. You not only wind up with more shares, almost 700, at much less average price of $43 as against $50 in the first instance.
It must, however, be noted that it is much easier to make such purchases in a rising market when your investment appreciates. You have to be pretty much disciplined and stick to your strategy when the market is falling. You must also be aware of that each dollar buys more in a falling market, which potentially leads to higher gains in the future as the market recovers.
Although it is impossible to predict the market trends in the future, but historically, the market has risen over the long term and it takes the conservative investors right along with it.
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