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Dollar Cost Averaging (DCA)

DCA Explained

Dollar-Cost Averaging is an investment approach that involves buying a fixed dollar amount of an investment on a regular basis, regardless of the then-current price. When prices fall, more units are purchased. On the other hand, less units are purchased when prices rise. DCA is beneficial to investors as it does not involve timing the market. Investors instead decide to purchase at all price levels and hold their investment for a long period of time.

DCA Example

Let’s assume that Investor A purchases $100 of XYZ Corporation on the first of each month. The share price of XYZ Corporation on the first of each month was as follows:

January: $8.00

February: $13.00

March: $10.00

By following the DCA investment approach, Investor A is able to purchase a number of shares equal to $100 divided by the share price. Therefore, the number of shares purchased each month is:

January: $100.00 / $8.00 = 12.50 shares

February: $100 / $13.00 = 7.7 shares

March: $100 / $ 10.00 = 10 shares

By March 1st, Investor A owns 30.2 shares of XYZ Corporation, spending an average of $9.93 per share. Seeing that the current share price is $10.00, the original investment of $300.00 has turned into $302.00.

Additional Resources:

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