Picking the stock at right time or at a lower cost can be a challenging task. Even the best of the brains end up doing a mistake quite often by buying stocks when stocks are trading at a high and selling stocks when they are trading at a low. In order to prevent this many follow something known as Rupee Cost Averaging.
Rupee cost averaging is a method wherein people invest a fixed amount at regular intervals irrespective of the price of the stock. What this does is, people end up buying more units of the stock when stocks are trading at a low and buy less when stocks are trading at a high. Didn’t understand ? Okay, let’s take example of potatoes to understand this. Imagine potatoes are trading at ₹40 per kilogram this month and you buy potatoes worth ₹100. You basically get 2.5 kilograms in the aforementioned scenario. Now imagine potato price drops to ₹20 per kilogram and you buy potatoes worth ₹100. In this case you get 5 kilogram of potatoes. At the end of two months you’ve spent ₹200 and you have 7.5 kilograms worth of potatoes. But imagine you bought ₹200 worth of potatoes in the first month. In this case you’d get only 5 kilograms of potatoes since they were trading at ₹40 per kilogram.
We actually saw two scenarios in the above mentioned example. In the one scenario you got more potatoes when you spent ₹100 in two intervals. And in the other you got less since you invested in lump sum. Well in stock market the potatoes are stocks. Also note, eventually the price of potatoes should rise, only then you’d make a profit. The mistake most people make is they buy a falling stock. Imagine the price of potatoes goes to ₹10 per kilogram, don’t you think you made a loss since you got it at ₹40 and ₹20 per kilogram. Now imagine the price of the potatoes hits ₹50 in the third month. You’d be in a profit now, wouldn’t you ?
Assume the stock is a dividend paying stock and back to potato story, when you invested in lump sum you got 5 kilograms. You got 7.5 kilograms in the other case. Assume the stock pays a dividend of 10 paise per stock. If you had invested in lump sum you’d get 50 paise and in the second case you’d get 75 paise. Note the dividend here isn’t monthly.
Can you outperform Rupee Cost Averaging ? In the potato story we saw how the price fluctuated every interval. Assume you spent ₹200 when potato was trading at ₹20 per kilogram. Now you’ve got 10 kilograms and the dividend is 10 paise multiplied by 10 which is ₹1. Clearly this happens to be greater than all the previous examples but how do you do it ? The answer to it is technical analysis. There are certain indicators that show whether the stock is overbought or oversold. One can make use of it to buy stocks at the dips. This process is a bit difficult for stocks that are in up trend and are bluechip because if you keep on waiting for the right opportunity there’s a chance that it mayn’t come and you may have to shell out more if you wait for long. I was tracking some companies and one of them was Bharti Airtel. The stock was above ₹600 and it collapsed to a little above ₹500 and now its back at ₹600 plus at the time of writing this post. The reason for the fall was bad news. But things eventually got better.
Conclusion – Rupee Cost Averaging if done correctly brings down the average money spent on the stock, it is helpful in the long run, provided the stock is a good stock and its price reaches higher.
Well folks, that was it for this post. If you liked this post do check out other posts on this website. See you next time with a different one. Byeee 🙂
Disclaimer : Trading stocks is subjected to market risks. Please read all the terms and conditions before investing. The motive of this lesson was to teach little things about stocks for those who do not understand much about stocks. Candidcanblog.com will not hold any responsibility for any losses incurred to the readers of this post.