Dollar cost averaging refers to a strategy that is used by the investors to manage the risk of price
when he has made an investment in stocks or mutual funds. It is an investment strategy
by which investors divide the total amount of money that they want to invest in purchasing
small quantities of a particular asset over a period of time at uniform intervals.
The investor prefers to invest with dollar cost averaging rather than investing the
total amount in a specific asset at a time or with a single purchase to decrease
the impact of inconsistency on the overall purchase of an investor.
This investment strategy reduces the price risk for an investor that is he/she may have
to pay more for a particular investment at a single time before the fall in market prices.
Market prices don’t only fluctuate in one way so by dividing the purchase and making investments
in multiple stocks or mutual funds, an investor increase his chances of paying a lower average
price in time. Additionally, dollar cost averaging helps an investor to get his invested money to
work on a stable basis, as it is the main factor for any long-term investment growth.
Understanding Dollar Cost Averaging (DCA)
Dollar-cost averaging is a process or strategy of an investment through which an investor invests
by dividing the total money to be invested in a specific asset over stable intervals of
time. Investors can make the investments by opting shares to purchase shares of that specific asset
once a week, per quarter, per month or as per the schedule of any other investment.
The investor invests the same amount of money every time,
despite the price of an asset with the dollar-cost averaging method. The aim of dollar-cost averaging
is to decrease the impact of market uncertainty and volatility. With this investment strategy,
an investor can purchase more shares per dollar in the situation of fall (down)
in market, and in case of rise (up) an invest can purchaser fewer shares with the same dollars.
How Does Dollar Cost Averaging Work?
Dollar cost averaging is an investment strategy which takes out the emotion from
an investment through buying the consistent small amount of money in a given asset on a
regular period. This means an investor purchase less shares when market prices are up and more
when prices are down. For example, an investor has a total of US $600 to invest every month.
What is the significance of Dollar Cost Averaging?
Dollar Cost Averaging is an investment strategy that helps new investors or people who want to
start investing and don’t have a lump sum amount to start with. With the Dollar Cost Averaging,
investors with low amount of money can also invest by planning a budget
with a specific percentage of their income every month.