Dollar Cost Averaging

From Financial Literacy Wiki

Dollar cost averaging (DCA) is an investment strategy that takes the form of investing equal amounts of money regularly and periodically over specific time periods (such as $500 monthly) in a particular investment tool. By doing so, more units of the investment tools are purchased when prices are low and fewer units are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time.

In dollar cost averaging, the investor decides on three parameters: the fixed amount of money invested each time, the investment frequency, and the time horizon over which all of the investments are made. With a shorter time horizon, the strategy behaves more like lump sum investing.