Dollar-Cost Averaging - DCA

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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."

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BREAKING DOWN '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."

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RELATED FAQS
  1. Over what period should I use dollar cost averaging?

    Dollar cost averaging is a strategy that mitigates the timing risk of investing a large sum of money on a particular day. ... Read Full Answer >>
  2. For what investments is dollar cost averaging most effective?

    Dollar cost averaging is a simple and effective investment plan that involves buying investments in small chunks at regular ... Read Full Answer >>
  3. Which is better: dollar cost averaging or value averaging?

    Historical comparisons seem to indicate that value averaging (VA) tends to outperform dollar cost averaging (DCA), offering ... Read Full Answer >>
  4. 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 >>
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    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
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