Dollar-cost averaging: What is it, and how does it work?

Asked 3 years ago

Dollar cost averaging Investment strategies Risk management

Andia Rispah Igobwa

Monday, October 18, 2021

Dollar-cost averaging is a strategy in which you invest your money at regular intervals, regardless of the price or what's going on with financial markets. We call this pound-cost averaging in the UK because it works out to be cheaper per unit time than other investments like buying stocks when they're cheap and selling them later for profit (or not). 
The pre-planned purchases can take many forms, such as investing one dollar every week, doing five shares every month, purchasing £10 worth each year, etc. However, I recommend holding onto some funds so that if something goes drastically wrong altogether, there are still enough resources available without having invested everything upfront.
The strategy is based on the fact that you can only afford a certain number of shares when prices are high. When they drop lower in value to where your investment was at its peak point before recovering again with increased share purchases due- mainly because having more assets results in profiting from both market highs and lows!
How does dollar-cost averaging work?
When you dollar-cost average, your investments must be in an index fund. You'll receive different proportions of shares each time because share prices vary from day to day and week to week!
A good way for beginners who don't know what they're doing with their money might be the following: start by investing $100 per month into a single stock or mutual fund (whatever best suits), then add more every time there is give added funds if needed - remember though not too much. Hence, as go over-budgeted but rather just right where things will still grow steadily without needing huge fluctuations between "high" points due to market corrections or 'downfalls' as they're referred to.