Dollar-based Investing: Buying on Your Dollars
Stocks are rarely round in number. You don't often find that $20 stock out there. Instead, you find $3.26, $12.52 and $105.79. Stock prices don't usually stick to the whole dollar amounts. Most investors traditionally purchase stocks by investing in a whole number of shares. The cost is the number you buy multiplied by the price. For example, buy three shares of the $12.52 stock and you pay $37.56. Dollar-based investing works a little differently. You buy stocks (or other investments) in a dollar amount that you choose. You don't have to purchase just the multiples of the stock price. If you want to invest $50 a month, you don't necessarily purchase an exact whole number amount of shares. You are buying just $50 worth of shares. For a $12.52 stock, your $50 buys you 3.99 shares of a stock. You can buy 1/2 of a share, 1/4th of a share or even 8/25 of a share. This method works really well for the ordinary investor who wants to consistently invest in the stock market over time. The investor decides how much a month can be put back and invests that amount every month. Few people have $10,000 to invest at a time. Most don't even have $1,000 in a lump sum to invest. However, dollar-based investing makes it possible to invest that money by putting it in the stock market in smaller increments. The fact is that few people are dedicated enough to save up and then purchase some stocks. But if they invest a little at a time, they are saving and investing at the same time. The temptation isn't there to go out and spend what you have saved to invest. You've already invested it. Dollar-based investing is great for the beginning investor who simply needs to make a habit of investing in the market. By letting money build in a safe stock over time, you are saving and investing at the same time. This method gives you the added edge of buying at the current price. If you were to save for four months to buy one share of a certain stock, what guarantees that the price won't go up considerably in that time? By buying 1/4th of the stock each month, you are taking advantage of the current lower price. You are already making money on your investment. Dollar-based investing allows you to save just as a savings account or a money market account does. But if you are looking for a long-term savings, dollar-based investing allows you greater return potential. Keep in mind that you still must choose your stocks wisely, as there is always risk. By choosing a low-risk company to invest in, you can watch your stocks build and grow at the same time.
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