DRIPS (Dividend Reinvestment Plans) are the most common vehicle for
dollar cost averaging investments. These plans allow you to make small
investments on a regular basis. Combine a small monthly investment with
dividends that are received being put back in and soon you will have a nice
little nest egg.
Short Term Dollar Cost Averaging
If you have only a modest amount of money to invest on a regular basis,
you might be wondering how to invest them. You can go to your local bank and
earn a standard interest rate. This will secure your basic investment and
slowly grow over time. The secret here is that it will grow slowly.
Dollar cost averaging allows you to invest that small amount into a
larger portfolio. You can create additional wealth by investing in a dollar
cost averaging stock plan. Many large companies offer these types of plans allowing
you to diversify your portfolio.
Like other stock market investments, there are risks involved. You may
find that over one year you have invested $1,000 and at the end of the year
your investment is worth $500. This is where a dollar
cost averaging plan can help you.
Benefits of Dollar Cost Averaging in DRIPs
A dollar cost averaging plan means that when you invest additional
money you are investing in shares that have a fluctuating purchase price. You
may purchase some shares at $100 and others at $75. This brings down your
average purchase price.
Another benefit to DRIP
plans for dollar cost averaging is the ability to purchase fractional
shares. This means that if you have a stock that is worth $100 per share and
you receive a dividend (or make a small investment) that you will be able to
purchase less than one full share.
Long Term Dollar Cost Averaging
When you continue a dollar cost averaging plan over time, you have the
potential for significant rewards. If you continue making regular investments,
you could recognize large gains in the value of your portfolio.
As stocks go up and down in price, your cost per share changes. Over
time, your investment grows in increments and your cost of your shares changes
with nearly every investment. Here is an example of how your costs can change:
Month 1: Invest $100
Cost per share of stock $50
Own 2 shares
Average cost: $50.00
Month 2: Invest $50
Cost per share of stock $45
Own 3.11 shares
Your average cost is $48.23 ($150/3.11)
You can see in the long term, the benefits would be significant.
No guarantee of success
A dollar cost averaging system does not guarantee your investment. Like
any other stock market investment, you can lose your entire investment. Dollar
cost averaging with a DRIP plan does allow you to invest in several companies.
If you are considering any type of dollar cost averaging through a DRIP
plan, you will want to discuss the risks and rewards with a qualified financial
planner. They can help you understand how dollar cost averaging can work for
you.
Dollar
cost averaging using a DRIP program is a great way to save money.
Rates of return are much higher if you hold your positions for long periods. An
advantage of dollar cost averaging is that you can make a small amount of money
go a lot further.