Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund or a dividend reinvestment plan (DRIP).
Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower.
The advantage of this type of formula investing, which may also be called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share.
But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices.
Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.
- Browse Related Terms: Capital gains distribution, Compounding, Direct investment, Direct purchase plan (DPP), Distribution, dividend, Dividend reinvestment plan (DRIP), dollar cost averaging, Fractional share, Growth, January Effect, reinvestment, total return, Total return index
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