How to Use Investment Strategies: Dollar Cost Averaging
Dollar Cost Averaging is one of the best investment strategies, because it forces you to buy more shares of a stock while it is priced cheaply and less shares of a stock when it is more expensive. Over time, if you use dollar cost averaging to buy into the stock market, you should come out ahead. Basically, dollar cost averaging forces you to buy low so that later you will be able to sell high! This article will tell you how to invest, but not what you should invest in. If you need help deciding what to invest in, see some of my other eHow articles in the Resources section below.
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Instructions
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The first step to dollar cost averaging is to pick a dollar amount that you want to invest, and the interval between investments. For instance, you might decide that you can afford to invest $300 every month in a stock or fund.
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Next, you must be punctual and invest the $300 in the stock or fund every single month at the same time whether the price goes up or down. This way, if the price goes down, your $300 dollars will buy you more shares, and if the price goes up, your $300 will buy you less shares.
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Keep repeating these steps and over time, studies have shown, your automatic dollar cost averaging will make more money than someone who has tried to time the stock market and invest based on their instincts. Think of it, if you begin dollar cost averaging near the bottom of a recession you are buying more of the stocks at the bottom for a great deal-- when the recession is over, you will hopefully have a bunch of shares that are worth a lot of money!
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Tips & Warnings
If you need help setting up a brokerage account, or trying to find stocks that are worth buying, check out some of my other articles in the Resources section below.
Sharebuilder.com is a discount brokerage that is based around the idea of making dollar cost averaging cheap, easy, and automatic.
Since this article is meant to be a brief introduction to dollar cost averaging, I've included a link at the bottom of the Resources section to books that deal with investment strategies.
This strategy only works over the short term, so if you are looking to save money for a short period of time, this strategy is probably not the one for you.
