Pound Cost Averaging

Pound Cost Averaging is the term used to explain the technique of buying a fixed amount of an investment through regular savings. An Investor who puts money into an investment on a regular basis, may benefit from the smoothing out effects of short term fluctuations in the share price that can be normally experienced.

The table below illustrates how pound cost averaging works using an example of a regular investment of £100 per month:

Month	Amount Invested (£)	Share Price (p)	Number of Units Purchased
January	100	30	333.33
February	100	50	200.00
March	100	55	181.82
April	100	60	166.67
May	100	65	153.82
June	100	60	166.67
July	100	50	200.00
August	100	60	166.67
September	100	65	153.85
October	100	65	153.85
November	100	70	142.86
December	100	80	125.00
Total	1200	710	2144.55

We can see that the share price can go up and down from month to month. This will affect the number of shares purchased. When the share price is high, the number of shares purchased will be fewer. However when the share price falls, the number of shares purchased will increase.

In the example the average share price is 59.16p over the 12 months, but the average cost per share is 55.95p. So the amount paid per unit is 3.21p less than the average price over the same period which has resulted in the investor paying less per share by investing regularly.

This "drip" feeding into the market can therefore be beneficial and over the longer period it smooths out the short term fluctuations.