Take the Risk OUT of lump sum Penny Stocks Investments with Cost Averaging
Apply Cost Averaging to Your Portfolio
Average?
Whether you are an amateur penny stocks investor, or a full time penny stocks trader cost averaging penny stocks investments is one portfolio management tool you need to know.
An old financial tool still relevant to penny stocks investors everywhere
Cost Averaging is by no means a new idea. People have been Shekel cost averaging, Dollar cost averaging, Pound cost averaging, and Yuan cost averaging for centuries. Whether you are spending Pounds, Dollars, or Yuan makes no difference.
Always Pay a Near Average Price Regardless of Volatility
Cost averaging can be a reliable way to obtain shares at an average price regardless of how volatile the markets are. It’s also a great tool to use when you have to recover from a bad investment by significantly lowering the breakeven point.
Cost averaging Penny stocks isn’t rocket science
The method is simple. Rather than investing a lump sum in a share on a single day when the price may be high the investor breaks the sum up into smaller incremental installments. Smaller fixed amounts are invested over a fixed schedule.
Cost averaging can eliminate guesswork
Some conservative investors stick pretty rigorously to a schedule. For example an investor might make an equal dollar amount purchase at 11:00 am on the 14th of every month for one year. On purchase days when the share price is low the investor gets more shares for the amount they spend than on days when the share price is high.
Curb your enthusiasm and stay out of trouble
Since even the best penny stocks investor never really knows with absolute certainly where a share price is going this disciplined approach prevents the investor from speculating that the share may have reached rock bottom and investing more. The down side is that it doesn’t stop an investor from buying shares when the price is high.
A Modified Approach to Cost averaging Penny Stocks Investments
Another method is to put a ceiling price on the shares regardless of the schedule. If the price is too high on the schedule date the investor simply waits until the price is below the ceiling price. The drawback here is that a good investment may never come back down and you can miss the boat.
Smoothing out the lumps
All things being equal at the end of the schedule the average price paid for the entire portfolio of shares should in theory be close to the average price for the share over the interval regardless of ups and downs.
One last important use: recovery
If you find yourself in the unfortunate position of having sold the silverware and put everything into XYZ Company only to see the bottom drop out of the share price rather than run away it might be a good idea to sell your golf clubs and buy more shares.
The effect of investing more in a share that is heading South is that the average cost per share in your portfolio is reduced meaning that the share won’t have to rebound fully for you to break even if you bail.
What is Liquidity and Why is it a Problem for the Penny Stock Investor?
