What is Cost Averaging in the Stock Market?

Exponential smoothing: Prediction of stocks
Exponential smoothing: Prediction of stocks (Photo credit: Wikipedia)

Cost averaging is one of the investing strategies used in the stock market today.  Cost averaging is one of the safest ways to invest in the stock market.

How does it work?

To be able to take advantage of the cost averaging strategy, you must set aside a fixed amount of money which you will you to purchase stocks of great companies at regular intervals, for example, setting aside P5,000 every month to purchase stocks of a company you did research on.

Since the stock price of all companies always fluctuate, you will be able to purchase a particular company’s stock at different prices.  The higher the price of the stock goes, the less you can purchase with your fixed budget, conversely, the lower the price of the stock, the more stocks you can purchase with your fixed budget.

Since you purchased the stock of a particular company in different prices, in the long run, your investment will earn the average difference of the price at which you sold the stock and the various prices at which you purchased the stocks.  This is the reason why the cost averaging method is a long term strategy, minimum of 3 years investing.

Here is an example to make the cost averaging strategy clearer.  Please note that these are all fictitious numbers and the total cost was computed as is, no broker fees have been added as opposed to real transactions.

In the following table, let’s assume that your monthly budget is P5,000 and the regular schedule to purchase stocks is every first of the month and this is done regularly for 3 years:

Date Purchased Stock Price Stocks Purchased Total Cost
1/1/12 21.1 236 4979.6
2/1/12 22 227 4994
3/1/12 19 263 4997
4/1/12 18 277 4986
5/1/12 20 250 5000
6/1/12 21.5 232 4988
7/1/12 22.5 222 4995
8/1/12 23 217 4991
9/1/12 22 227 4994
10/1/12 21 238 4998
11/1/12 23 217 4991
12/1/12 22 227 4994
1/1/13 21 238 4998
2/1/13 19 263 4997
3/1/13 17.5 285 4987.5
4/1/13 18 277 4986
5/1/13 18.5 270 4995
6/1/13 19 263 4997
7/1/13 21 238 4998
8/1/13 22 227 4994
9/1/13 21 238 4998
10/1/13 22 227 4994
11/1/13 23 217 4991
12/1/13 24 208 4992
1/1/14 25 200 5000
2/1/14 23 217 4991
3/1/14 22 227 4994
4/1/14 20 250 5000
5/1/14 19.5 256 4992
6/1/14 18 277 4986
7/1/14 17 294 4998
8/1/14 16 312 4992
9/1/14 15 333 4995
10/1/14 16.5 303 4999.5
11/1/14 17 294 4998
12/1/14 18 277 4986
                        9,024    179,766.60

Total number of shares purchased in 3 years is 9,024 and the total cost to purchase these shares is P179,766.60.

If for example the price of the stock we have been purchasing is P21.00 today and we decide to sell all our shares, 9,024 x 21 = P189,504.  P189,504 less 179,766.60 (our total initial investment) = P9,737.40 profit in 3 years.  That’s a 5.4% growth by just investing regular amounts at regular periods.

Your next question might be, how would you know what stocks to buy and when to buy? That’s where the Truly Rich Club of Brother Bo Sanchez comes in, they will tell you which stocks to buy, what price to buy and when to sell.

Click here

to join the Truly Rich Club 

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