Dollar-Cost Averaging - DCA

AAA

DEFINITION of 'Dollar-Cost Averaging - DCA'

The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.

Also referred to as a "constant dollar plan."

INVESTOPEDIA EXPLAINS 'Dollar-Cost Averaging - DCA'

Eventually, the average cost per share of the security will become smaller and smaller. Dollar-cost averaging lessens the risk of investing a large amount in a single investment at the wrong time.

For example, you decide to purchase $100 worth of XYZ each month for three months. In January, XYZ is worth $33, so you buy three shares. In February, XYZ is worth $25, so you buy four additional shares. Finally, in March, XYZ is worth $20, so you buy five shares. In total, you purchased 12 shares for an average price of approximately $25 each.

In the United Kingdom, it is known as "pound-cost averaging."

VIDEO

Loading the player...
RELATED TERMS
  1. Systematic Investment Plan - SIP

    This is a plan where investors make regular, equal payments into ...
  2. Automatic Investment Plan - AIP

    An investment program that allows investors to contribute small ...
  3. Average Up

    The process of buying additional shares at higher prices. This ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  5. Compounding

    The ability of an asset to generate earnings, which are then ...
  6. Average Down

    The process of buying additional shares in a company at lower ...
RELATED FAQS
  1. If I own stock that drops in price is this a sign that I should buy more?

    This is a good question, and the answer has two parts. First, let's address the concept underlying the strategy to which ... Read Full Answer >>
Related Articles
  1. Budgeting

    5 Disastrous Financial Moves We Can't Seem To Avoid

    These money errors are all too common. Make sure you know how to avoid them.
  2. Fundamental Analysis

    The Perks Of Dividend Reinvestment Plans

    These plans offer shareholders a way to directly invest in some of the top companies without the commissions.
  3. Mutual Funds & ETFs

    Reinvesting Capital Gains In Leveraged Portfolios

    Don't get forced into action. Learn how to plan properly to avoid making rash decisions.
  4. Investing Basics

    Choosing Between Dollar-Cost And Value Averaging

    These are two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk.
  5. Investing Basics

    Start Investing With Only $1,000

    Find out what fees and restrictions need to be considered before investing $1,000.
  6. Retirement

    Two Roads: Debt Or Financial Independence?

    A higher income won't make you richer - unless you learn to live on less.
  7. Mutual Funds & ETFs

    Dollar-Cost Averaging With ETFs

    If you are investing small amounts regularly into an exchange-traded fund, be sure to do it right.
  8. Markets

    Buying Stocks When The Price Goes Down: Big Mistake?

    Averaging down is a trumpeted strategy that has merit, but when it is used carelessly, it can amount to throwing money away.
  9. Retirement

    6 Problems With 401k Plans

    If you pay attention to the problems here, you will be able to avoid the negative effects and meet your retirement goals.
  10. Insurance

    Take Advantage Of Dollar-Cost Averaging

    We explain how dollar-cost averaging offers protection and opportunity in a sinking market.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center