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. Assuming that 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 changed 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 that in the long term, the benefits would be significant.
There are No Guarantees
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 a number of 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.
Summary
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.