Dollar cost averaging is the investing a fixed amount of money periodically without any regards to the stock’s price. Since the money being invested is not based on share price, and share price fluctuates, the fixed amount you choose to invest will buy more stocks when share prices are down, and when the share prices are high your funds will buy fewer shares. The benefits of dollar cost of averaging are you do not need lump sum to invest, helps minimize risk, help the investor take advantage of the markets’ volatility, and the investor does not have to attempt to try and time the market.
With the use of dollar cost averaging, the investor does not have to worry about lump sum to get into a particular stock investment. Dollar cost averaging is great method for investors that cannot afford lump sums as an initial investment. It is great for investors who can afford to invest smaller amounts of cash over time. There are more investors who still work their day job, and do not have large amounts cash available to invest at one time; therefore, the dollar cost averaging makes investing available to almost everyone.
Dollar cost averaging helps the investors minimize risk. It minimizes risk by investing a fixed amount of money overtime instead of attempting to introduce money to an investment at the perfect time only to be loss by a sharp drop in the market. Dollar cost averaging helps deals with the volatility of share price. As mentioned, more stocks are brought when share price is low and fewer stocks are purchased when the stock price is high. An example of dollar cost averaging at work is when an investor may choose to invest a 401K plan offered by his or her employer.
An investor does not have to attempt to time the market with the use of dollar cost averaging. The investor consistently adds to positions of stock portfolio no matter what state the market is in. Timing the market is almost impossible to do by experts investors; therefore, dollar cost averaging removes attempting to time the market out of investing.
There are many benefits that dollar cost averaging offers to the investor. It really makes investing available to almost anyone, because the large lump sums are no longer needed when attempting to invest. Dollar cost averaging will allow the investor to consistently invest money into their portfolio on a regular basis. Investor no longer has to worry about the volatility of the market, because shares will be brought regardless of the share price. The benefits of dollar cost averaging cannot be ignored. It will continue to be a great method of investing, because many investors like to take advantage of the benefits that it offers.