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Using dollar-cost averaging
Dollar-cost averaging is a common defensive technique in
which an investor makes regular, periodic purchases of a
fixed-dollar amount of one or more individual securities
or mutual fund shares.
Using this strategy means you're continually
investing, regardless of fluctuating price levels, and
you tend to see rewards over time, not immediately. This
strategy can't, of course, guarantee a profit or
safeguard an investor against losses. And, you should
consider your financial ability to continue purchases
through periods of high price levels.
The following table shows how the technique works:
|
|
Amount Invested |
Price Per Share |
# Shares Purchased |
|
|
|
|
|
Jan. (initial investment) |
$1,000.00 |
$12.00 |
83.33 |
|
Feb. |
$100.00 |
$10.00 |
10.00 |
|
March |
$100.00 |
$13.00 |
7.69 |
|
Apr. |
$100.00 |
$9.50 |
10.53 |
|
May |
$100.00 |
$11.50 |
8.20 |
|
Totals |
$1,400.00 |
$11.20 Avg px per sh |
119.75 |
*This table
reflects hypothetical values.
The formula for determining the average dollar cost (or, the
actual share price, taking all
purchases into account) is:
COST (total $$ amount
invested) / Number of Shares
Purchased
By this formula, the average
cost of the stock purchased
above was: $1,400 /
119.75 = $11.69
It's easy to see the benefits
of this strategy |
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