Dollar Cost Averaging

Dollar Cost Averaging:  a term referring to the practice investing consistent amounts of money at consistent frequencies over long periods of time, which will statistically lead to lowering the average purchase price per share as the stock price goes through up and down fluctuations.

Dollar Cost Averaging is an investment edge that the DRIP Investor is particularly poised to take advantage of.  Aside from the definition, Dollar Cost Averaging can best be illustrated by an example:

1. Buy $1000 worth of Microsoft at $50/share

2. Buy $1000 worth of Microsoft at $60/share

3. Buy $1000 worth of Microsoft at $40/share

4. Sell all of the Microsoft shares at $50/share

 You end up with $83 profit (2.7%)!
Even though you sold your shares at the average purchase price!

At first glance, this may seem strange.  But the concept is really quite simple.  Because you kept your investment consistent, you bought more shares when they were cheaper and less when they were more expensive.  In the above Microsoft example, 20 shares were purchased at $50/share, 16.67 shares were purchased at $60/share, and 25 shares were purchased at $40/share.  You end up with 61.67 shares.  Had you bought all of the stock at $50/share, you would only have 60 shares.  Instead, you acquire 61.67 shares at an effective price of $48.64/share.

This is not a mathematical trick.  Dollar Cost Averaging is a statistical consequence which gives a distinct long-term yield advantage to anyone frequently investing in a stock.  And DRIPs are the best way to consistently invest in a stock (without letting a broker cut into your profits).

The more a stock fluctuates, the more significant the Dollar Cost Averaging advantage. Over the long-term, if a stock price fluctuates between 45 and 55, your effective price will be 49.84--giving you a gain of 0.33%.  If a stock price fluctuates between 40 and 60, effective price is 49.33--giving a gain of 1.36%.  Between 35 and 65, effective is 48.46--with a gain of 3.18%.  If a stock varies between 30 and 70, your effective price would be 47.24--giving you a gain of 5.85%.

Also consider these facts, when evaluating whether DRIPs are the right investment option:

• the Dollar Cost Averaging advantage doesn't include the extra yield you will get from dividends.

• DRIPs are the most practical way for individual investors to take advantage of Dollar Cost Averaging.

• Compared to other investment alternatives (speculative trading, buy and hold, mutual funds) DRIPs will give individual investors the highest yield because of Dollar Cost Averaging, Elimination of Brokerage Fees, and the Compound Effect (dividends buy more shares, which increase dividends, which buy more shares, etc.)

To learn about how DRIP Wizard software can help you manage your DRIP, stock, and mutual fund investment portfolios, Click Here.