Understanding Dollar Cost Averaging (DCA) in simple terms

Dollar cost averaging (DCA) is an investment strategy in which an investor divides their total investment amount into smaller parts and invests those smaller amounts at regular intervals, rather than investing the full amount all at once. The goal of DCA is to reduce the impact of volatility on the overall purchase of an asset by spreading out the investment over time.

For example, imagine that an investor wants to invest $10,000 in a particular stock. Instead of investing the full $10,000 all at once, the investor could choose to invest $2,000 per month over the course of five months. By doing this, the investor is able to average out the purchase price of the stock over a longer period of time, rather than buying all of the shares at a single point in time when the price may be higher or lower.

DCA can be a useful strategy for investors who are trying to minimize risk, particularly when investing in volatile markets. It can also be a good option for investors who do not have a large sum of money available to invest all at once, as it allows them to gradually build their investment over time. However, it is important to note that DCA does not guarantee a profit and can result in an investor paying more for an asset if the price decreases over time.

This page was last updated on January 2, 2023.

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