Dollar Cost Averaging
The best time to purchase stock is when the price is low. However, it is challenging to predict the market. So to avoid trying to “time the market” (buying when the market is down, selling when it's up), some investors take advantage of dollar-cost averaging.
Dollar-cost averaging is a conservative approach to investing that provides an alternative to making a lump sum investment in securities at one time. This strategy allows investors to commit to purchasing a fixed-dollar amount of a particular investment on a regular schedule, regardless of the share price.
Using this strategy, an investor purchases more shares of a stock when share prices are lower, and fewer shares when prices are higher, resulting in a lower average cost per share.
How Dollar-Cost Averaging Works in a Fluctuating Market
No matter how the market is fluctuating, regular stock purchases can lower the average cost per share and increase your total number of shares purchased over time. However, a plan of regular investment cannot assure a profit or protect against a loss in a declining market.
*These graphics depict a mathematical model of Dollar Cost Averaging. This is a hypothetical example for illustrative purposes only and does not reflect an actual investment in any product, nor does it reflect risks, expenses or charges associated with any actual investment. Actual results may vary substantially from the figures in the example. Dollar cost averaging is a long-term strategy which does not assure a profit nor protect against a loss in a declining market. Investors should carefully consider their ability to continue regular purchases through periods of low price levels.