Pound cost averaging

Stock markets can be highly volatile, rising one day only to fall the next. Therefore a good way to invest long term is to drip feed money into shares or units on a regular basis – to get the benefit of pound cost averaging – rather than committing a single larger lump sum.

Suppose you have £400 to invest over 4 months and this buys 100 units in a fund at £4 each when the FTSE 100 is at 6,000 points. Invest the lot straight away and you get 100 units. Alternatively you could drip feed in £100 per month.

Your first £100 buys 25 units (100/4). With the market at say 5,700 after a month, the second £100 buys 26 units at £3.80 each (5,700/6000 x £4). The next £100 buys 27 units with the market at say 5,500 points and then the FTSE recovers to 6000 and you buy a final 25 units.

Overall you have bought 103 units this way, now worth £112, which beats owning 100 units worth £400 via the lump sum approach.

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Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.