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How to Buy Stocks — Use a Dollar-Cost Averaging Strategy
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Use a Dollar-Cost Averaging Strategy

Consider a Dollar-Cost Averaging Strategy

Sometimes the stock of a good company may go down at times. If you’re holding shares in that company when its stock price is down, you may want to consider buying more. This strategy is known as dollar cost averaging.

For example, let’s say in January you bought 10 shares of some ABC Corp for $100 with an expected return of 20%. Due to economic turmoil and market volatility, the shares go down to $80 two months later. This makes investors a bit concerned, yet the fundamental outlook of the company hasn’t changed. You still believe that the company’s true value is above $100, so a good strategy would be to buy more shares at $80.

If you buy 10 more shares, then your cost basis per share becomes $90, that is, the original 10 shares at $100 plus 10 shares at $80.

Cost Basis: the total amount invested in an asset, plus any commissions involved in the purchase. It’s often expressed on a per-share basis.

Let’s say the stock eventually goes up to $120. Now, instead of making a 20% return or $20 per share on your original investment, you’re able to make a 33% return, or $30 per share.

Dollar-cost averaging is a good strategy if you believe that the company can deliver on your original expectations. We'll expand more on this in our further chapters.