One-Minute Lesson: What is Dollar Cost Averaging? [300 words]

Updated – 12/6/23

What is dollar cost averaging? Also called the constant dollar plan, it is the technique of investing a fixed amount of money consistently.

When you use dollar cost averaging (or “DCA”) to buy stock, you will automatically buy more shares when prices are lower and buy fewer shares when they are higher. A nice, easy way to “buy low, sell high”.

green dollar sign made up of dollar bills

For example, let’s say you started dollar cost averaging $400 a month to buy a manufacturing stock. At $25 a share, you’d be able to buy 16 shares in the first month. If the price dropped to $20 a share in the second month, you would purchase 20 shares… and so on.

The Simple Benefits of Dollar Cost Averaging

If you understand that stock prices rise and fall constantly, you can become better prepared to deal with the fluctuations.

When you get into the habit of dollar cost averaging, you start looking at losses in the market as buying opportunities.

It flips your mindset from a scarcity mindset to an abundance mindset.

Assuming the price of the investment does eventually rise, a dollar cost averaging plan will help you capitalize on lower market swings by assigning you more shares. It also helps you stay consistent as an investor, which will materialize into superior gains in the long term.

Even if the price of the investment doesn’t rise to the point that you originally planned, dollar cost averaging still helps you save consistently. While you might’ve lost some value in your investment, which can happen with any investment, you can still sell out and reallocate your funds to a better opportunity.

Because of this chance of loss, you want to ensure you pair a solid dollar cost averaging plan with diversification. This is a fantastic way to maximize your investment gains.

Andrew Sather

Andrew has always believed that average investors have so much potential to build wealth, through the power of patience, a long-term mindset, and compound interest.

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