Are you interested in investing in the stock market but don’t know where to start? One investment strategy that may be worth considering is dollar-cost averaging. Read ahead to find out what this concept means!
What Is Dollar-Cost Averaging?
Dollar-cost averaging is a strategy in which a person invests a fixed amount of funds in a target security at regular intervals, regardless of the market price.
By implementing it, investors can potentially reduce their average cost per share and minimize the impact of market volatility on their portfolios. Besides, this approach eliminates the need to time the market to achieve optimal prices.
What You Need To Know About Dollar Cost Averaging
It is typically easier to understand the dollar-cost averaging definition with the help of an example. Let’s say an investor wants to invest $1,000 in a particular stock. Instead of buying $1,000 worth of shares all at once, they may choose to invest $100 every month for ten months.
If the price of the stock is high one month, the investor will purchase fewer shares, but if the price is low the next month, they will get more of them. This means that over time, the investor will end up with an average cost per share that is lower than it would have been if they had purchased all of the shares at once.
One potential downside of dollar-cost averaging is that it can limit your potential returns if the market consistently rises over time. Since you are investing a fixed amount of money at regular intervals, you may miss out on the opportunity to buy more shares when the market is low and benefit from a larger increase in value when it rises.
However, dollar-cost averaging is a long-term strategy. While it may be tempting to time the market to maximize your returns, this is often extremely challenging and can lead to poor investment decisions. Opting for dollar-cost averaging instead allows you to take a disciplined approach to investing, which can help to build wealth over time.
