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CHAPTER 8

Dollar-cost averaging lets you participate in the stock market, without having to time the market

(1)

$15 $10 $5

Jan Feb Mar Apr May Jun

$10

$12

$14

$16

$18

$20

Accumulated

Average market

shares

price per share

42.25

$15

Your average cost per share

$14.20

(2)

$15 $10 $5

$10

$8

$5

$5

$8

$10

85.0

$7.66

$7.05

(3)

$15 $10 $5

$10

$8

$5

$4 $1 $1

267.5

$4.83

$2.24

$100 invested per month. Total invested: $600.

Figure 8.2: This is a hypothetical illustration; it does not represent any particular investment. Dollar-cost averaging does not ensure a profit or avoid a loss if the market declines. Investors should consider their ability to continue investing during periods of low market prices. Source: American Express Funds.

have purchased equities on margin, you become a liability to the bro- kerage house and yourself. If the market increases when you sell short, you become a liability to yourself.

Investors who practice short sales are generally more sophisti- cated and have a higher tolerance for risk. Short sales shouldn’t be entered into lightly. If you are considering selling some securities short, make sure you have done adequate research and will be able to cover your position.

Selling a security short involves selling the equity that you don’t already own. Rather, the brokerage house borrows the security for you to sell, and then later, you receive the proceeds from the sale. Of course, the borrowed shares must be replaced at some point in the future. This is why you hope the market price declines. If it does, then you purchase the stock at the lower price, and make a profit. This is the reverse order of the basic contrarian position (buy low, sell high) since you are selling high and then, hopefully, buying lower.

Selling short is a perfectly legal way to work with the market and make some money. There are a number of rules and regulations that

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