Your money is an asset you cannot waste due to wrong or untimely decisions. Thus, how you invest your money in stocks can have a great impact on the profit you gain on them.
US dollar cost averaging is a great technique to help you invest your money in a volatile stock market. Instead of investing all of your money at the same time, the technique encourages you to invest your money in smaller predetermined portions on a regular schedule to reduce the risk of investing and to reduce the average cost per share.
This curtails you from investing a large amount of money on a single investment at an unfavorable time.
A Favorable Trading Technique during a Stock Market Swing
The stock market is very volatile and fluctuates on a constant basis. This is because the market tends to react to good and bad news, resulting in changes in the stock price.
For a value investor, a negative swing would be a great opportunity to purchase securities at prices lower than their intrinsic value.
However, it is still quite risky to invest your entire capital in a single investment at one point in time. With dollar cost averaging; this risk is reduced to a minimum, as you will only spend a certain portion of your money, regardless of whether the stock market is high or low.
If the stock prices fall, you will be able to buy more shares and if the stock prices rise, you will be able to procure a limited amount of shares if you follow this technique.
However, in the long term, your average cost per share will be lower than what it could have been, had you invested your entire capital at a single time.
The technique lets you smoothly face the ups and downs of the stock market and enables you to earn better profits when you sell on a market rebound. This makes the technique highly favorable to execute during stock market swings.
Reduce the Stress – Increase the Profits
Active and passive investing are strategies that many traders opt for when trading stocks. Active investors buy stocks and monitor them on a regular basis in order to take advantage of profitable market conditions.
On the other hand, passive investors buy stocks for longer periods to get advantage of the appreciation that occurs over time.
Regardless of the strategy you pick, trading stocks can sometimes be overwhelming and stressful.
Many traders find it difficult to cope with the constant market mood swings and feel vulnerable about their money being at stake. Dollar Cost Averaging can help traders out of this situation.
It helps to reduce the stress faced by an average trader and enhances the profitability of the trade as well. The fixed rule implemented by the technique of spending a certain portion of the money only, on a regular basis, leaves no space for stress or no need to constantly monitor market fluctuations.
You are simply required to invest as per schedule without having to worry about the share price. The technique allows you to invest in stocks with ease and reduces your anxiety over every stock market swing.
Conclusion
In a nutshell, trading the spread becomes less risky and more profitable when you follow the dollar cost averaging technique.
After investing your entire capital by following this technique, you will find that you paid a lesser amount per unit of stock on average.
This will lead to greater profitability in the long run and will allow you to spread your investments and risk over a greater period of time.
For those who are not too experienced in trading stocks or for those who do not have the time to constantly monitor the market and its fluctuations, dollar cost averaging is a great trading technique to use.
Also, if you are hesitant about investing in stocks, using dollar cost averaging as a beginning strategy will help you overcome your anxiety and stress, and will allow you to confidently invest your money without having to worry about your lack of experience or expertise.
Implement this technique to invest your money cleverly and to get the best return on your investment.