Let me start by saying that investing is risky business. You should consult a professional for professional advice before doing any investing. I’m a hobbyist, not a professional.
What exactly is dollar-cost averaging?
Dollar-cost averaging is a method of long-term investing. By buying stocks in smaller chunks over time, the amount you pay for the stocks will balance itself out to an average. So, in an example, if you were to buy 1 share of Microsoft for $50, then another share for $40, your dollar-cost average price per share would be $45. So if the shares go back up to $50, you would be making money by selling. Obviously, this is normally on a much larger scale. Think 10s, 100s and 1000s of shares.
Another example. If I buy 50 shares of Microsoft stock at $50 and then the stock market tanks. Suddenly, my 50 shares of MSFT are only worth $25 each. That hurts. The stock is still strong, but the market is poor. I decide to buy more. This time, I can buy 100 shares for the same amount as before. Now, I own 150 shares of Microsoft and my total cost is 50@$50 and 100@$25. My cost per share is dollar-cost averaged down to $33.33 each. The stock only has to gain $8 for me to break even, and anything beyond that is gains. (note that I’m not including anything as far as fees. Those will vary)
In troubled economic times, many people often overlook the benefits of dollar-cost averaging and participate in the mass hysteria. If, instead, investors would take advantage of the opportunity, they could find themselves the recipients of a handsome profit when the market returns to it’s normal levels. That, of course, is if it returns to it’s normal levels. Which it most likely will.
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I like the math in this.
So $5000/150 shares = $33.33/sh.