What is dollar cost averaging, and what does it have to do with

Dollar cost averaging is the spreading the cost of an investment over a longer period of time in set increments. The benefit of dollar cost averaging is that in the long run, the likelihood of making a profit increases because the risk is decreased because you are actually easing your way into the market. Taking this route can actually increase your profits immensely if a particular stock hadn't done well when you initially invested, but when it starts to rise again, you make more money because initially you hadn't had your whole bang and buck thrust into the stock. For example, you buy a stock for $25 a share. You invest all of your $2,000 into the stock and then it goes through a low point of $5 a share. You have lost quite a bit of money. It would require quite a bit of growth to regain those loses. If you had used the dollar cost averaging technique, the initial blow would have been less and when the entire amount is finally invested, the high and lows of the market would have leveled out to a normal growth. This requires patience and the ability to pay into the investment at regular increments.

Another way to exploit the profit power of dollar cost averaging is to invest in another form of averaging. Index funds are funds that, for each share purchased, is literally a piece of thousands and thousands of different companies in the stock market. The management fee for an index loan is considerably lower which in the long run will actually save you, the investor, thousands of dollars that would have gone to mutual fund management. Passive funds bought using the dollar cost averaging technique together is a great opportunity for you to make money and still have a sense of security when investing in the stock market. Taking advantage of the diversification of an index loan will average out the losses and gains into a steady growth that can be charted each quarter. Investing money this way could, over time, depending on the market and the amount of time you set for each increment, double your money. Obviously the sky is the limit with this technique if you can learn to how to apply it to other facets of investing.

Dollar cost averaging is also known as "constant dollar plan." The simplicity of this technique is that you buy at a fixed dollar amount of a particular investment on a regular schedule regardless of how high or how low the share price is. This may seem ridiculous, especially when you find yourself putting money into an investment that seems to be losing value quickly. The reality is that stock prices are always changing. The reason dollar cost averaging, or the constant dollar plan works is because when prices are low, you buy more shares, and when prices are high you buy fewer shares. This cushions you against severe loss and actually accumulates profits as time goes by. Because the shares are bought in a spread out manner, it actually lowers the average cost per share. As a result, dollar cost averaging lessons the risk of investing too much money in a single investment at the wrong time.

This technique is easy to understand when you have seen it applied to real life situations. Go online and look at published results of dollar cost averaging investments and see how money is actually being made. It is a tool that will help make your investing career a far less risky one and ensure your opportunity for a security in your retirement.