When we say investing in Singapore Exchange, many usually think of savvy investors dressed in suits and reading the business section of the newspaper. Young Singaporeans can start investing in SGX Singapore Exchange too and you need not be a millionaire.
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In 2015, the board lot size of the SGX Singapore has been reduced from 1,000 to 100. This has attracted a lot of young adult investors to dip their feet in stocks exchange. However, despite how inviting this chance can be, Singaporeans remained risk averse. We are too careful not to lose our money though everyone knows that risks will always be involved with investing. This is why Dollar Cost Averaging is a good way to start your investments as a beginner.
DCA is an investment technique of buying shares on a regular schedule with a fixed dollar amount that will not change even if the prices of the shares do. Basically, those who use this method can buy more shares even when the price goes down and less if the price goes up. Nevertheless, the investors just regularly buy shares.
For example, you invest $500 each month in ABC Bond Fund. The prices of the ABC Bond Fund shares on your first month of investing are as follows:
- Month 1: $23
- Month 2: $25
- Month 3: $34
- Month 4: $25
- Month 5: $29
Since each month you are investing $500, you get the following number of shares:
- Month 1 shares: $500 / $23 = 78
- Month 2 shares: $500 / $25= 20
- Month 3 shares: $500 / $34 = 14.71
- Month 4 shares: $500 / $25 = 20
- Month 5 shares: $500 / $29 = 17.24
After five months you owned a total of 93.73 shares regardless of the prices of the shares you have bought each month. If today is month 5, then the price of shares is at $29 and you currently own a total of $2,718.17 with of stocks from an investment of $2,500.
DCA is investing regularly, and since nobody can tell the future of stock prices, it still holds firm whether the prices fluctuates or collapses. There is also no telling on when is the right time to buy, therefore you potentially have the good chance to buy shares at the best time.
The shares usually have low prices during a financial crisis, and even the known blue ships will dramatically go cheaper than its usual stellar price. Since you regularly buy shares, you can acquire some of it before it goes up again. Simply, DCA lessens your worry as it is a safe strategy. Despite the unpredictable wild changes on prices you can keep calm and focus on the shares you can buy instead of the thinking about prices of your own shares dropping. Eventually the prices are going to change.
Lessens the Risk of Buying Urges
Since you have a fixed amount each time you buy shares, you have given yourself a limit. There is a great risk that you will buy a lot of shares then sudden downturn happens.
The Prices Eventually Go Up
Since you constantly purchase shares everyday regardless of price changes, you are bound to have shares that will eventually rise overtime such as S&P 500 which has been delivering returns of 9.1% per year in over ten years.
It is Accessible to Small Investors
You can invest as low as $100 each month. You can start buying blue chip Singapore stocks through POSB and OCBC bank, investing in into blue chips and the STI is proven to be more cost-effective.
You Need to Identify Good Shares
DCA does not save you from the risk of getting a bad pick, your research does. It is still true that you must only invest on things you are comfortable with and you have knowledge about. Take some time to read to avoid buying losing investments.
The environment of stocks is ever changing and if you keep on investing in a passive manner, you will not grow your investments. You will have to change your approach if you see that you are not earning anything. Choose wisely the shares you are buying and not just blindly taking risk in unknown stocks.
Always be vigilant with the trend, a losing stock will be a losing stock even if you wait for the financial crisis to get better. Just because it is cheap, you will buy it. Some shares are cheap because it is a bad pick.
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