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Dollar Cost Averaging

Dollar cost averaging is a method used commonly by investors to reduce the risks of investing over time. In a risky market, the dollar cost averaging strategy is a form of protection against loss that occur with fluctuations. According to this system, the investor should invest some dollar amount on a regular basis, both at times when the prospect looks good and when it is bad. This does not mean buying the same amount of stock - that would have the potential for significant losses - it means paying the same, so an increase in the price of each stocks would mean to buy less stock until it equals the chosen investment price. This way, the risk is leveled by the fluctuations and your budget is maintained regardless since the price is used each time. In order for dollar-cost averaging to work, at least in theory, is for the investor to buy according to the strategy even when they know the stocks have gone down.

Fast Facts

  • dollar cost averaging is used in favor of investing a lump sum
  • Example: Joe buys $30 of stock each week. When the price is $1 per stock, he buys 20. When it is $2, he buys only 15, keeping the same total price

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