There’s often irrational panic in investment markets. <\/p>\n
Most recently that’s been due to the Wuhanvirus\/coronavirus\/covid19 scare.<\/p>\n
If you’re selling while the stock market is falling, you’re losing<\/em> money.<\/p>\n You want<\/em> to buy low, and sell high – but since you can never know where either the bottom or top is, how can you mitigate against market ups and downs?<\/p>\n Cost averaging.<\/p>\n What is cost averaging<\/a>? It’s a way of hedging your investments against momentary swings in the stock market by lowering your average cost<\/em> of each share.<\/p>\n Universal Widgets Inc (UWI) is trading today for $10 per share. You like the company, and decide to buy $1680 in UWI shares (a total of 168 shares). <\/p>\n Next month, UWI has dropped to $7 per share. You still believe in the company’s future, and you still have $1680 to invest in the market, so you buy another<\/em> $1680 worth of UWI stock at $7 per share (240 shares total).<\/p>\n Two months later again, and UWI has dropped to $3\/share. Perhaps your confidence in the company has dropped some<\/em>, but if you sell now<\/em>, you’re guaranteed to lose<\/strong> over $2000! So instead of selling<\/em>, and guaranteeing your loss, you again buy $1680 in shares (560 more).<\/p>\n You now have 968 shares of UWI that cost you $5040.<\/p>\n But they’re only worth<\/em> $2904.<\/p>\n What share price does UWI need to hit in order to show a profit?<\/p>\n Now you merely have a simple math problem: take the cost<\/em>, subtract the value<\/em>, and divide by total shares<\/em>: (C-V)\/S<\/p>\n $5040 – $2904 = $2136<\/p>\n $2136 \/ 986 = ~$2.21<\/p>\n So when UWI gets back above $5.21 per share, you’re in the black<\/a>.<\/p>\n If\/when it recovers to your initial purchase price of $10, your portfolio will be worth $9860!<\/p>\n By cost averaging, you’ve reduced your risk, and increased your likelihood of coming out ahead when investing<\/p>\n This is, more-or-less, how some mutual funds grow (and why<\/a> beginning investors (and most seasoned investors) should buy-into mutual funds instead of individual stocks).<\/p>\n from antipaucity https:\/\/antipaucity.com\/2020\/03\/12\/cost-averaging\/ There’s often irrational panic in investment markets. Most recently that’s been due to the Wuhanvirus\/coronavirus\/covid19 scare. If you’re selling while the stock market is falling, you’re losing money. You want to buy low, and sell high – but since you can never know where either the bottom or top is, how can you mitigate against …A simplified cost averaging example for Universal Widgets Inc.<\/h4>\n
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