In doing this strategy, the investor buys more shares when
the price per share is low and buys fewer shares when the price per share of
the stock is high. When summing the total average cost per share of the
investment, the investor expects that the total amount of his investments will
be lower compared to the current value of his stocks in the stock market.
The Peso Cost Averaging strategy believes to dampen the risk
of investing large amount of money in a single transaction at the wrong time.
To
illustrate further this type of strategy, let’s do some computations. Let’s
take BPI common stock for our example.
Stock Code:
BPI
Board Lot:
10
Share Price Dates:
January 2011 to December 2012
Duration: 2
years
Note: Trading
of stocks in PSE is done by board lot or round lot system. Board lot is the minimum
number of shares one can purchase or sell at a specific price range.
Example:
Supposed
that you have already your Online Trading Account and you want to start
investing in the stock market using the PCA Strategy. You plan to deposit
P5,000.00 in your cash position for your investment every month for common shares of
BPI starting January 2011. How much will be your return of investment at the
end of December 2012?
The given
board lot for BPI stocks is 10. With this you can only buy shares of BPI at any
quantity but divisible by 10. If on January 2011, the price per share is
P51.50, the P5,000 pesos in your cash position can buy only 90 shares based on
the board lot. With the price per share of P51.50, the total cost of 90 shares is
only P4,635.00. The remainder of P365 from your P5,000.00 (P5,000 – P4,635) will
stay in your trading account and will be added to your next deposit of P5,000
to be used to buy shares again next month.
Continue to
do this until the end of December 2012 and you will come up with the results in
the table below.
Your
investment data at the end of December 2012, will be:
Total Shares
Purchased: 1,860 shares
Total Amount
Invested: P119,341.00
Amount Left
In Cash Position: P659.00
Average
Price per Share: P66.07 per share
At the end
of December 2012, your investment present worth will be:
Present Worth
of Investment = Total Number of Shares x Current Price per share
Present Worth
of Investment = 1,860 shares x P95.00 per share
Present Worth
of Investment = P176,700.00
Your returns
on investment within two (2) years of building your investment thru PCA will be:
% ROI = (P176,700
– P119,341.00) / P119,341.00 x 100%
% ROI =
P57,359.00 / P119,341.00 x 100%
% ROI =
48.06%
Investing using the Peso Cost Averaging strategy is automatic and stress-free in sense that you will continue to invest and buy shares no matter what will be the trend of the stock market. It is more favorable to implement this strategy on long term to secure full benefits and advantages.