Trading
Dollar-Cost Averaging
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Dollar-Cost Averaging formula
Average cost per share = total dollars invested ÷ total shares bought
Dollar-cost averaging means investing the same dollar amount at regular intervals regardless of market ups and downs, so that the fixed sum buys more shares when the price is low and fewer when the price is high.
How dollar-cost averaging works
The SEC's Investor.gov glossary defines dollar-cost averaging as investing your money in equal portions, at regular intervals, regardless of the ups and downs in the market. It describes the approach as one that can help manage risk by following a consistent pattern of adding new money to an investment over a long period, and notes that by making regular investments with the same amount each time you will buy more of an investment when its price is low and less when its price is high. The arithmetic result is that the average cost per share paid is the harmonic mean of the purchase prices, which is always at or below the simple average of those prices. Workplace retirement plans apply the method automatically through paycheck deductions, and brokerages can schedule recurring purchases.
Hypothetical example: $300 a month at prices of $30, $25, $20 and $25 buys 10, 12, 15 and 12 shares, 49 shares at an average cost of $24.49 versus the $25.00 average price. See the DCA calculator.
What dollar-cost averaging does and does not do
The method removes the decision of when to invest and spreads purchases across a range of prices, which reduces the risk of committing a large sum just before a decline. It does not guarantee a profit or protect against loss: if the price falls steadily and stays down, every purchase loses money, and the lower average cost only means a smaller loss than a single purchase at the first price. In a market that rises steadily, investing a lump sum at the start would have produced a better result, because later purchases happen at higher prices. It is therefore a discipline for deploying cash flow over time rather than a way to beat the market. It pairs naturally with index funds and a fixed asset allocation, and the same recurring-purchase logic underlies compound interest projections.
Hypothetical example: prices instead rise from $20 to $25, $30 and $35. The investor buys about 45.6 shares at an average cost of $26.32; a $1,200 lump sum at $20 would have bought 60. See the compound interest calculator.
Example
Hypothetical: $300 invested monthly at prices of $30, $25, $20 and $25 buys 49 shares for $1,200, an average cost of $24.49 versus the $25.00 simple average price.
Common mistakes
- Assuming dollar-cost averaging guarantees a better result than investing a lump sum.
Dollar-Cost Averaging — FAQ
What is Dollar-Cost Averaging?
Dollar-cost averaging is investing a fixed dollar amount at regular intervals regardless of price, so you buy more shares when prices are low and fewer when they are high.
Can you give an example of Dollar-Cost Averaging?
Hypothetical: $300 invested monthly at prices of $30, $25, $20 and $25 buys 49 shares for $1,200, an average cost of $24.49 versus the $25.00 simple average price.
Is dollar-cost averaging better than lump-sum investing?
Neither is always better. In a steadily rising market a lump sum invested at the start buys more shares at lower prices. Dollar-cost averaging reduces the risk of investing a large amount just before a decline and removes the timing decision, but Investor.gov frames it as a way to manage risk, not a guarantee of profit.
Does dollar-cost averaging guarantee a profit?
No. If the price falls and stays down, every scheduled purchase loses value. The method lowers the average cost per share relative to the average price, which reduces the size of a loss compared with a single purchase at the starting price, but it cannot turn a declining investment into a profitable one.
How often should I invest with dollar-cost averaging?
The definition only requires equal amounts at regular intervals. Monthly is common because it matches paychecks and many retirement plans, while weekly or biweekly schedules spread purchases further. More frequent purchases can mean more transaction costs if your broker charges commissions, so the interval usually follows cash flow and costs.
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