Dollar Cost Averaging, explained

hi it's Patti here marketplace today I want to talk about dollar cost averaging that's when you invest a certain amount of money in a certain security on a regular basis regardless of the price when you buy alright so this is a great way for individual investors to get started buying a certain stock because you don't have to pay that much out every month it's also a great way to reduce your risk if you want to invest a large lump sum in a single security they take Arianna for example she gets twelve thousand dollars from her grandma and she decides that she wants to put all of that money into Microsoft now she could of course just go out and spend the twelve thousand right now and at fifty dollars a share she'll get two hundred and forty shares the problem is of course that she doesn't know whether she's getting a good deal I mean if Microsoft is going to have a good year and she buys all these shares and it steps up every month then those 240 shares are going to be worth quite a lot at the end of the year goodbye of course if Microsoft it's is at its peak right nine it's only going to slide from here it means that those shares are going to be worth less and less every month so she's really taking a risk by buying everything at one go she could reduce that risk by using dollar cost averaging by spending a thousand dollars putting it into Microsoft every month at the price that it's quoted at on the first of the month of course that means that right now she's going to get 20 shares next month if Microsoft is doing really well she'll get fewer shares if Microsoft does poorly the month after that so get more shares and on and on and on so at the end of the year alright she will pay an average price for those shares for the entire year that may mean of course that she gets you know many more than 240 shares okay but of course if Microsoft is really well during the year and every month it steps up and up and up it means she's going to buy less and less shares which means of course that she may end up with many fewer shares and that's going to leave her well probably very badly need hit drink

Channel: paddy hirsch

Views: 202,844

Keywords: Dollar Cost Averaging, investing, shares, Business, stock, Trading, Market

Id: ZFEnwg54Zj4

Length: 1min 52sec (112 seconds)

Published: Fri Dec 19 2014