FINANCIAL HOUSEKEEPING: Learn about trading futures
Many investment programs being advertised in infomercials or the personal-finance magazines tout the benefits of trading futures and offer systems to make futures trading easier.
But many of the investors who consider these programs know next to nothing about how futures contracts work. To that end, the investor learning center at the National Futures Association website –
www.nfa.futures.org – is a one-stop shop for learning from the bottom up. Whether you are a novice or just want more information on foreign exchange trading (forex), the learning center has a touch-point that covers the basics.
Investors who can’t understand the site’s easy-to-read materials should come away convinced that they don’t know enough to trade futures.
SHORT COURSE: Dollar-cost averaging
Also known as a “constant dollar investment plan,” dollar-cost averaging is the process of investing a set amount of money at regular intervals. By investing the same amount regularly – say $100 a month – the investor buys more shares at low prices and fewer when prices rise. By investing a steady dollar amount, the overall cost is lower than if the investor purchased the same number of shares (say 10 per month) at regular intervals.
For example, consider two investors in the ABC Fund, one making a $100 monthly deposit, the other buying 10 shares every month. Both start with the fund trading at $10 per share. On the monthly purchase day for the next four months, say ABC shares trade at $8, $8, $10 and $12.50.
The dollar-cost-average investor has put in $500 over five months for 53 shares, bought at an average price of $9.43 each. The constant-shares investor has bought 50 shares at a total cost of $485 (average price $9.70).
