Dollar Cost Averaging
Definition
Investing fixed amounts at regular intervals.
Dollar Cost Averaging (DCA) is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of share prices.
How It Works
DCA involves investing a set amount of money, such as $200, on a regular schedule, like monthly or quarterly. Here's how it works:
- You decide on a fixed amount to invest and the frequency.
- When the market is high, your investment buys fewer shares.
- When the market is low, your investment buys more shares.
Why It Matters
DCA can help reduce the impact of market volatility on your portfolio. Here's an example:
Scenario: You invest $100 every month for a year. In months when the market is up, you buy fewer shares. In months when the market is down, you buy more shares. By the end of the year, you've bought more shares when they were cheaper, potentially lowering your average cost per share.