Start Investing the Easy Way: Dollar Cost Averaging

Many people, especially as they look at the current stock market situation, worry about getting started in investing. After all, it can be a scary proposition, since all investments carry the risk of loss. And in a volatile stock market that is part of an economic slowdown that is creating uncertainty, it can be down right terrifying to get started in investing.

However, there is a way to start investing the easy way. If you use dollar cost averaging, you can limit your risk exposure, and you can start small.

What is dollar cost averaging?

In dollar cost averaging, you buy portions of shares. This technique is sometimes called fractional investing. This is because it is possible to buy only part of a share, rather than a whole share. Consider that one share of something costs $75. You only have $50 to invest. With dollar cost averaging, you would buy 3/4 of a share. Likewise, if the share cost $30, you would be able to buy 1 2/3 shares of the stock.

Dollar cost averaging works because the point is that you invest a set amount consistently. You set up an investment account (discount online brokers can be great for this) and then you put an amount in automatically every month or every two weeks. It works best when you have direct deposit and you have the money automatically taken from your bank account and put into your investment account.

If this sounds familiar, it should. If you have a retirement account, you are already using dollar cost averaging.

Advantages of dollar cost averaging for the beginning investor

There are different advantages of dollar cost averaging for the beginning investor:

1. You do not have to have a lot of money to get started. Many accounts allow you start with a minimum account of $1,000 to $2,000. Others allow you to start with as little as $500 or even as little as $10.

2. You don't have to put in a lot each time. Dollar cost averaging works best when you invest regularly. But it doesn't have to be a large amount. Some online discount brokers allow you to invest as little as $10 or $25 each time.

3. Limited risk. Risks are limited, since you aren't buying large amounts of stock each time. This means that during a down market, you won't lose as much money -- but you will be able to automatically buy up more stock. Which is an advantage after the market recovers.

4. Gets you used to investing. Dollar cost averaging gets you used to investing. After you start small, you can move on to something bigger.

Remember that you still have to research your investment decisions and make good choices when dollar cost averaging.

Disclaimer: I am not an investment professional. This should not be taken as investment advice. You always have the risk of loss in investment, and you make investments at your own financial risk. Before making an investment decision, consult with a professional and/or do your own research.