Dollar-Cost Averaging (DCA)
Candlefocus EditorDCA helps protect investors from the volatility of market prices. Instead of investing all of their money at once, DCA encourages investors to invest smaller amounts into the same asset over time. This helps to spread out the risk and protect against extreme losses.
The average cost per share is also lowered by DCA. Investing an equal amount at regular intervals gives the investor a better opportunity to take advantage of fluctuations in the market prices. As the market price of an asset rises, then fewer shares are purchased per investment. Conversely, as the market price of an asset falls, then more shares are purchased per investment. This helps to average out the price per share over time.
The practice of DCA also eliminates the need for a large and potentially ill-timed lump sum investment. With a lump sum investment, the timing of the investment can be the difference between success and failure in the stock market. If the market drops shortly after investing the lump sum, then an investor can suffer a significant loss in value.
Dollar-cost averaging can be an attractive option for both beginning and long-term investors. It provides an easy way for inexperienced investors to get into the stock market without needing to be able to accurately time the markets and also offers experienced investors more stability over their portfolios.
Ultimately, dollar-cost averaging is a simple, yet effective tool that provides investors with the potential to spread out their risk and increase their returns. As long as investors are willing to commit to a strategy of investing regularly and not trying to time the markets, dollar-cost averaging may be an attractive option to consider.