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Introduction to Dollar-cost Averaging
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Dollar-cost averaging is a systematic investing technique used to accumulate shares of stock or a mutual fund over many month or years. You invest a specified amount of money to buy shares at a regular interval, say each month, and then you hold them for the long term.

As the stock price moves up, a specified dollar amount purchases fewer shares but when the stock price moves down, you buy more shares. The average price per share is computed by dividing the total cost of all shares by the number of shares. Thus, you dollar-cost average.

Some buy-and-hold investors use dollar-cost averaging in retirement accounts with dividend reinvestment. And they fund their purchases with payroll deductions or automatic debits from a bank account. All large mutual funds and many brokerage accounts allow such automatic investing.

How does Dollar-cost Averaging Work?

Here is a simple example of dollar-cost averaging. Suppose you invest $100 each month to buy shares of a stock. The following table shows five monthly purchases at different prices and the resulting number of shares and their value.

Dollar-cost Averaging
Date
Price per Share
$ Invested
# Shares Bought
Total # Shares Owned
Total $ Value
March 1
$50
$100
2.000
2.000
$100.00
April 1
$52
$100
1.923
3.923
$204.00
May 1
$58
$100
1.724
5.647
$327.54
June 1
$56
$100
1.786
7.433
$416.24
July 1
$61
$100
1.639
9.072
$553.41


After five purchases the total amount invested is $500 and you own 9.072 shares. Therefore, the average cost per share is $55.11 ($500/9.072). As of July 1, the 9.072 shares are worth $553.41.

Be careful with dollar-cost averaging. It works when prices are on the upside. But if you make repeated purchases on the downside and prices keep falling, you will lose money. Be particularly cautious with individual stocks of poorly-managed companies or stocks whose prices have increased rapidly. These stocks can quickly decline from very high prices to very low prices. For cyclical stocks take your profits when prices are high.

Use the Dollar-cost Averaging Calculator to see how dollar-cost averaging performs with any stock.


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