Business, Legal & Accounting Glossary
Dollar-cost averaging is a long-term investment strategy in which a fixed dollar amount is added to an investment on a regular schedule, regardless of the market price of the security. Dollar-cost averaging is also called a constant dollar plan. Since an investment’s share price fluctuates, by following a dollar-cost averaging strategy, more shares are bought when the share price is low, and fewer shares when the share price rises. Over time, dollar-cost averaging results in a lower average cost per share than a plan that involves purchasing an equal number of shares at each interval. Dollar-cost averaging is a popular way to invest in mutual funds, and investing regularly through dividend reinvestment plans is a form of dollar-cost averaging. While dollar-cost averaging reduces the risk of investing a lump sum in a single investment at the wrong time, dollar-cost averaging does not guarantee the investor a profit.
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This glossary post was last updated: 9th February, 2020