Buy HIGH Sell LOW

Did the title confuse you a little bit? I hope it did, because it means you'd be paying attention. The true way of doing this is actually to BUY low and SELL high. Why did I name this post the opposite, then? Because that is what the majority of people do and then wonder why they stay broke.

Here's my attempt at simply explaining a powerful concept. Dollar Cost Averaging.

Let's say you have the option of buying stock at $10 per share (stay with me on this, it's not that hard). So you buy 10 shares. You then invested $100. (10 shares X $10 = $100) You do this on a monthly basis.

Now the stock market does well, and your shares are worth $12 per share. So this month you put in your usual $100 and now only purchase 8.3 shares with the same $100. ($100 / $12 per share = 8.3 shares)

If the market continues to do well, your share prices will rise in value. We could get to a day where your shares are now worth $20 each! While you may think this is great news, you are actually buying less and less each month. Because that same $100 now only gets you 5 measly shares!

Now let's flip flop the way the market performs.

Instead of rising in price, let's say share prices drop to $8 per share. If you take your usual $100 and buy the same stock, you now own 12.5 shares. ($100 / $8 = 12.5 shares)

The market continues to drop next month. But you don't panic, you buy more shares the next month now at $6 per share. Now you've purchased 16.6 shares!

Here's the good part. Let's say in a good market, you buy your 5 shares for that 100 bucks. The next month the price is $22 for each share. You sell the 5 shares you bought for $110 and make a $10 profit.

Okay, not bad.

But you just had a down month in the market and bought those 16.6 shares instead. It only grew to $9 per share. You sell those shares for a total of $149.40. Your profit is now $49.40. Almost five times better than the first example.

So the lesson is to continue to buy into the market no matter how it's doing. People listen to the news too much and panic when the market isn't doing too well and pull out all their money way too soon. If you ride the wave, you are actually going to be purchasing more shares and then when the market spirals back up, you will own more shares, and therefore be worth a lot more money.

So don't be like most people buying high and selling low. Stick to the rule of thumb of buying LOW and selling HIGH, and you will be much more pleasant with the thought of the market.

BUY BUY BUY!