| Introduction | | | | $28, 83 shares at $30, 96 shares at $26, and 92 |
| Dollar Cost Averaging, or DCA, is a technique where | | | | shares at $27. |
| you purchase a fixed dollar amount of your favorite | | | | Overall he purchased 360 shares at an average price |
| investment at regular intervals, such as once per | | | | of $26.67. |
| month. | | | | In this case, Trader B came out on top, purchasing |
| When prices are down, you will receive more shares. | | | | 2% more shares at nearly 8% less than Trader A. |
| When prices are higher, you will receive fewer | | | | That won't happen in every case, but you get the |
| shares. The idea is that you will be able to take | | | | idea. |
| advantage of dips in the prices but also minimize | | | | Why it Works |
| buying at higher prices. In the long run your average | | | | Since the markets have historically gone up over the |
| share price will be somewhere between the highs and | | | | long run, buying shares at regular intervals over the |
| lows throughout that time period, resulting in less | | | | long run should go up too. DCA should reduce the |
| volatility than putting all your money into just one or | | | | effect of volatility in the prices throughout the year, |
| two large trades. | | | | but it will probably reduce your chances of large |
| This technique is very simple and can be set to run | | | | gains. This is the classic tradeoff in investing of risk |
| automatically on many online brokerages such as | | | | versus reward. |
| ShareBuilder. This is a great option for investors who | | | | Further Diversification |
| do not have time to sit at a computer every day | | | | Any single stock has the potential to "bomb" on you, |
| watching for the perfect price to come along. | | | | causing massive losses. One great way to reduce this |
| Example | | | | risk greatly is to trade mutual funds, which often |
| Let's say two traders have $10,000 to buy Microsoft | | | | spread out your money over hundreds of different |
| shares. | | | | stocks. Combined with DCA, you should have a |
| Trader A decides to put half of his money in right | | | | relatively safe and easy investment strategy. |
| now at $28 per share, for 187 shares, and half of his | | | | Disclaimer |
| money next month at $30 per share, for 166 shares. | | | | This technique is not guaranteed to make you profits |
| Overall, he purchased 353 shares at an average price | | | | or eliminate the risk of losing money. It is really just a |
| of $28.94. | | | | way to average out share prices. For example, if a |
| Trader B decides to use DCA over a 4-month period, | | | | stock is dropping in price every month, your average |
| which is $2,500 per month. He receives 89 shares at | | | | price will be lower and lower, resulting in a loss overall. |