Monday, 3 June 2013

A Investment Strategy For Stocks Which Can Work For You

In the absence of any solid investment strategy the stock investing won't work for you. The main question here is: how to make investments in stocks with lesser risk while still earning some reasonable returns. Here we discuss a proven strategy for intelligent investment, an excellent tool which surely works if used in a proper way.
You can make use of a tool know as "dollar cost averaging" for lowering your risks and also improving the overall performance if you make investment in the stocks periodically over a period of time (like 401k investing plan). When you want to invest a good amount in the starting then this strategy will work wonders.
Here's an example of how to invest in stocks using this tool with a general diversified stock fund as the stock investment. Why we use this as our stock investing vehicle will be explained later.
Imagine you want to invest $60,000 in the stocks, while residing in a 401k investing plan. The stock market is turning volatile and you would want to lessen the risk at this time.
Solution for you: you can make use of dollar cost averaging by making investment of a similar amount of funds in a methodological way at some predetermined gaps. In the current case you will invest $50,000 by making investment of $10,000 after every three months interval, for about five quarters, in a completely diversified fund.
First of $12,000 at the cost of $20 gets you 600 shares.
Second of $12,000 at the cost of $15 gets you 800 shares.
Third of $12,000 at the cost of $10 gets you 1200 shares.
Fourth of $12,000 at the cost of $15 gets you 800 shares.
Fifth of $12,000 at the cost of $20 gets you 600 shares.
You invested total of $ 50,000 and purchased 4000 shares. Now the entire value of your investment is: 4000 X $20=$80,000. This means you reaped a net profit of $ 20,000!
The prices of share fell and then subsequently again recovered ending at the same price at which it initially started. You invested just same amount of funds each time for your buys ranging from $20 to $10. If you had made a lump sum investment of $60,000 at $20 you'd surely have faced some rough ride and would have been 20,000.
Try to make the dollar cost averaging as an integral part of your investing planning. It just compels you to buy more as stock prices move down which results in lower average cost for one share.
Understanding the investment mechanism in the stocks with a sound investment strategy which helps you in smoothing out risks is surely a key for a comfortable and risk free stock investing.