Dollar Cost Averaging
Lots of financial “experts” talk about “Dollar Cost Averaging” into a stock.
Instead of buying 20 shares all at once, maybe buy 5 shares a week, or month. This is “Dollar Cost Averaging”. It is best utilized for longer term holding of shares.
What I have never heard anyone mention is the commissions / fees involved with buying and selling this way. I always enter the TOTAL cost of buying / selling something to know how much the stock needs to increase to make a profit AFTER commissions and fees.
Commissions are usually the flat rate most brokers charge, like $4.50, $4.95, $7.00, and up. The commission is the same for one share, 10 shares, 1,000 shares, etc.
FEES are also charged when selling shares (at least by the broker I used), in addition to commissions. The fees on shares I have sold have been one cent to a few cents, but I only held the shares for a few days at a time, and usually less than 50 shares. Check with the broker of choice for possible additional fees.
**When brokers use the term “PER TRADE”, this is a generic term for the buying and selling of shares. Buying 5 shares would be a “trade”. Buying 5 shares a week for 4 weeks, would be four “trades” for the month.
For example, the above mentioned blocks of shares:
$4.95 buy
+$4.95 sell
=$9.90 per block
x 4 blocks
$39.60 Total commissions.
20 shares at once
$4.95 buy
+$4.95 sell
=$9.90 Total commissions
$29.70 difference
The main thing to know is that if choosing to buy and sell in smaller blocks, that the individual block will make a profit after all commissions / fees.
(Screen capture at 1680 x 1050 screen resolution on 22″ monitor)
The neat thing about tracking holdings with Yahoo! portfolios is the ability to put each buy / block in separately to know when it would become profitable. I put $9.90 cents in the commission field ($4.95 buy / $4.95 sell). This screen capture is a poor example, as everything is red. What I can do is watch the blocks to for one to go green. This way I know when a block will be profitable AFTER commissions.
When I was trading, I did not notice if the broker I was using would allow me to sell a certain number (block) of shares. If I had 20 shares, I do not know if I could have put in an order to just sell five of them. If all blocks are green, I could sell all shares at once and save transaction costs!
Looking at this same scenario in Personal Stock Monitor, it adds up the total cost of the shares (including comm/fees), and averages price out to $33.01. This tells me FSTR would have to reach a price of $33.01 for me to break even. The minor glitch with this method in PSM is by putting total buy / sell cost in every purchase, it jacks up the break even price point. In a sense this could be a “safety net” to make sure I wait until the stock reaches that price so I do not lose money if I sell in 5 stock blocks.
I am not against Dollar Cost Averaging. This is just something to consider!