Dollar-cost averaging is the process of reducing the force of volatility. This can be achieved by funding purchases over time, avoiding buying shares when they are high. It is simply buying shares at regular intervals and in equal amounts.
This will help you ensure that you do not use your money to buy at once at the high point, yet there are opportunities to buy when the price is low. It helps buy the dips and cash out the highs.
You committing to this procedure will help you invest when the market is down and gain massive profits when the demand is high. Here are a few comparisons on different methods that help you decide well on want you need to do.
Comparing Dollar Cost Averaging Methods
Buying In A Bearish Market
Calculating dollar cost averaging is very beneficial for you as an investor. To be able to calculate, you will need to compare to other buying processes. For example, if you have $10000, you can divide it equally among four purchases in a year.
This is what is generally known as spreading your funds or stocks. However, when applying your purchases, you will have about 295.8 shares, and profits to are plenty on each purchase. This is the best dollar-cost averaging method you can use.
Buying In Lumpsum
If you bought the shares at once with the $10k, you could only buy 200 shares. This also means you get fewer profits on purchase compared to when you buy in the bearish move. This method will require you only to add more money to get more gains.
Buying In A Flat Market
With a flattish market or a sideways market, the same purchases when spread will give you fewer shares, and profits are not as much. It looks pretty much like the Lumpsum method.
Buying In A Rising Market
A rising market is not advisable for buys. The market keeps rising, and at any moment market might fall. Besides, you might get a blow on your face when the market goes bearish, which means you are in pure losses. In this method, dollar-cost averaging is very weak, and your profits too are less unless you are trying short-term gains.
Why Dollar Cost Averaging Is Important
Dollar-cost averaging is essential, especially when buying the dips in a bearish market. It provides a better and long-term opportunity. If you are wondering why you should employ dollar-cost averaging, here are some main benefits.
- It helps you to avoid a lousy market. You also avoid putting all your money in one basket
- It helps you take emotions off your investments, especially when the market is against you
- It helps you to think on a long-term basis
- It helps you to know when to invest. Good timing is critical
However, you need to know that many stocks and shares get dividends, and you can also request reinvestment from your dividends. That will help you continue buying as you compound your gains.