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Dollar Cost Averaging

Definition: Dollar cost averaging occurs when you buy shares of stock at multiple prices over time.  This is what happens when you decide to invest periodically.

Advice: Dollar cost averaging is great because it removes timing risk.  You don't have to worry about getting in a stock at "the right time."  Consider this example:Option A: Invest $1,000 at $50 per share.Option B: Invest $250 per month for four monthsOption B:Month 1: $50 per share (5 shares)Month 2: $45 per share (5.56 shares)Month 3: $40 per share (6.25 shares)Month 4: $55 per share (4.55 shares).

 

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Jonny Boy said:

Jodi - this is the definition I used in my 2nd year commerce exam - dollar cost averaging is a long term strategy where a certain dollar amount is added to a security no matter how the security is performing the purpose behind dollar cost averaging it to get investors to buy more shares of securities. Because the price of securities fluctuates, investors tend to buy more when prices are down, and less when the prices are up. Dollar cost averaging over time usually results in a lower price, thus getting more money invested... Typically mutual funds are purchased with a fixed amount of money invested, at specific times, and on a regular basis.

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