The cost average effect benefit from falling markets.Image we got 5000 USD and we buy GM shares, we buy our stocks at the first red point of the chart above to the price of 37 USD per share. But our investment doesn´t act like we wish it would and finally we sell our stocks at the second red point to the price of 27 USD per share. Bad thing we realised a falling share price of 27 % which would be a loss of 1350 USD.
But there is also a way how to make 1000 USD profit which would be a stock market return of 20 %, with same same amount of money and the same chart. In order to achieve that we use the cost average effect so let me explain. We assume that we start to buy our shares at the first red point to the price of 37 USD per share. But this time we just buy 27,02 shares with the amount of 1000 USD. We always repeat that if the markets are falling and we believe that we have got a new depression. For this example I always bought shares with the worth of 1000 USD at the red marked points.
- 1000 / 37 USD = 27,02 Shares
- 1000 / 26 USD = 38,46 Shares
- 1000 / 21 USD = 47,61 Shares
- 1000 / 18 USD = 55,55 Shares
- 1000 / 19 USD = 52,63 Shares
So in March 2006 we got a total amount of 221.27 shares iand if we say we would sell them now at the green point for the price of 27 USD we got an amount of 5974,29 USD.
Sounds good but what´s the catch ? The problem is first of all that you also have to pay more charges for your trader when you trade more. The second thing is that you probably will be very sad when the quotation climbs up just after you bought your first tranche with the price of 37 USD, because you could have earned more. But conservative investors are definitely on the safe side with this principle because you can´t misdo much except you buy a company which crashes. Otherwise you can be happy if the stocks are getting cheaper, because you can afford more shares.
February 22nd, 2008 at 2:35 pm
[...] World Financial Blog wrote an interesting post today on Reduce your investment risk with the Cost-Average-EffectHere’s a quick excerptBut there is also a way how to make 1000 USD profit which would be a stock market return of 20 %, with same same amount of money and the same chart…. [...]
April 6th, 2008 at 10:42 am
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[...] comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also [...]
March 18th, 2009 at 5:22 pm
[...] comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also [...]
March 22nd, 2009 at 11:23 am
Hi,
Can i get a one small picture from your blog?
Thanks
Hobosic
July 25th, 2009 at 3:21 am
[...] comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also [...]
August 19th, 2009 at 3:12 am
[...] comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also [...]