Investing in the stock markets has led to wealth creation for many people. If done properly, the risks that accompany investing in shares can be reduced a great deal and profits from investing can become more likely than losses. This can be achieved through patience and discipline and by investing regularly in the markets.
Some investors believe in ‘timing’ the market, which means they ‘buy low and sell high’. While this course has its logical benefits, it is very difficult to get the timing right. Sometimes, one may buy at the highest point in the stock market cycle and then end up with stocks that are cheaper than they were at the time of buying. In order to avoid falling into this trap, a method of investing systematically and regularly will work much better in the long run.
The basic principle is to buy small lots of shares every month or every two months and buy them over the long term regularly. This way, the volatility of the market will not matter. If the share price is high, you get fewer shares that month and when the price is lower, you get more shares.
Let us say someone buys 100 shares of company X at $20 a share in January. His total investment is $ 2000. In February, the price goes down to $15 and he buys 133 shares ($1995). In March, the share price is down to $10 a share and he buys 200 more ($2000). Then in April, it goes up to $15, this time he buys 133 shares ($1995). So after four months, he has invested $7990 and has got 566 shares at an average price of $14.11. Investing smaller amounts periodically has caused the average price of acquisition of shares to go down.
Rome was not built in a day and neither should a fortune. By investing regularly but smaller amounts each time cause the average price of a share to become immune to the constant fluctuations that the stock market sees. Over time, you will acquire a large number of shares and then during a bull run or when you have achieved your financial goals, you can book profit completely or partially. Then the process can be continued again. Investing in smaller quantities, but regularly also makes it easier for you to exit a bad investment without already investing too much into the company.
However, in spite of this technique, it is important to invest in shares only after doing a careful check of the company’s fundamentals like EPS, PE ratio, etc. One should be careful not to invest based on tips. If you invest in good blue chip companies regularly and in smaller lots, over time, you will see the creation of a large amount of wealth.