What is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) is an investment strategy where an investor divides up the total amount to be invested across periodic purchases of a target asset to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals. This strategy is often used in stock market investing but can be applied to any type of investment. DCA is particularly popular among investors who aim to build their portfolio steadily over time.How Does Dollar Cost Averaging Work?
Dollar Cost Averaging works by spreading the total investment across multiple smaller purchases. Instead of investing a lump sum all at once, an investor invests smaller, fixed amounts regularly, such as monthly or quarterly. Thus, when the market price of the asset is high, the investor buys fewer shares, and when the price is low, the investor buys more shares. This approach can potentially lower the average cost per share over time, as it smooths out the purchase price in volatile markets.