No foolproof system has yet been devised to guarantee that you will always make money in the stock market but there are several systems that have proven to be quite reliable and successful.
The most commonly used method is called Dollar Cost Averaging .
By employing this system over years on the New York Stock Exchange you would have made a profit on at least 90% of the stocks listed.
The special feature of this system is that it is especially well suited for the amateur, inexperienced investor because it does not require any special knowledge or information.
To use this method you merely pick an amount of money that you can comfortably invest every month and then regularly invest that amount.
Dollar Cost Averaging works simply because you buy more shares when the price is low and fewer shares when the price is high. You will therefore make a profit on the greater number of shares you bought when the price was low.
Let's look at some examples of Dollar Cost Averaging:
Two investors, Mr. Bull and Mr. Bear, each decide to invest $100 a month. Mr. Bull is very happy because the stock he picked kept moving up at a regular and steady rate. Over five months he bought shares at 10, 12, 14, 16, and 18 dollars. His investment of $500 bought him 37 shares which are now priced at the current price of $18 are worth $667, a profit of $167, a gain of 34 per cent.
Mr. Bear, on the other hand, first thought he was unlucky because the stock he picked immediately went down after he started buying it. He bought shares monthly at 10, 4, 2, 6, and 10 dollars. But he was in for quite a surprise. Even though the price of the stock he picked never went above the price he started at, his $500 investment grew to $1,116 or 123 % appreciation. If you don't believe this, try working it out on a piece of paper. Mr. Bear never thought he would be happy to see the market drop.
You may wonder if this system would work if you picked a downtrended stock that came back up to its starting price. Assume a stock began at $12 and you bought there and at 8, 4, 8, 6, 4, 2, 6, 4, and 6 dollars always investing $100 no matter what the price. Even though your stock had dropped 50% in value from 12 to 6 dollars, your $1000 investment is now worth $1250 and has increased 25 per cent!
What about a stock that has no particular trend in any one direction but instead goes up and down? Buying $100 a month again, you buy your shares at 12, 14, 10, 8, 8, 10, 14, 10, 8, and 12 dollars. Over this 10 months the price has bounce to both sides of $12, its beginning and ending price. You would have bought 98 shares and made a profit of $179 and had an 18% gain even though your stock's price is not better than when you began.
Wouldn't it be a pleasure to be in the enviable position of caring whether the market went up or down and still have a good chance of making money?
Of course no system is going to help you if the market declines over a long period of time and must sell your stocks at an especially bad time. But dollar cost averaging is a proven, established investment method and is regularly employed by persons investing regularly in mutual funds.
Most important you must have courage to keep buying even during the down periods because it's during these times that the best prices are available and can help increase your profits even more.
