What is Dollar Cost Averaging (DCA)?
Dollar cost averaging is investing a fixed amount at regular intervals regardless of price, buying more shares when prices are low and fewer when prices are high, reducing the impact of volatility.
Dollar Cost Averaging (DCA) Explained
DCA removes the need to time the market, which even professionals struggle with. By investing consistently, you naturally buy more shares at lower prices and fewer at higher prices, lowering your average cost per share over time. It works best for long-term investors in broad market index funds. DCA can also be used in trading for building positions gradually.
Real-World Example
You invest $500 every month in an S&P 500 fund. In Month 1, the price is $100, buying 5 shares. In Month 2, the price drops to $80, buying 6.25 shares. In Month 3, it's $90, buying 5.56 shares. Your average cost is $89.64 per share — below the average price of $90 — because you bought more at the lower price.
Related Terms
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