GLOSSARY // General Investing
Dollar-Cost Averaging (DCA)
Dollar-cost averaging is investing a fixed dollar amount on a fixed schedule regardless of price, so the same $500 buys more shares when the price is low and fewer when it is high. The mechanical result: your average cost per share lands below the average of the prices you bought at whenever prices moved at all.
DCA is really a behavioral tool wearing a math costume. Studies comparing it to investing a lump sum immediately find the lump sum wins about two thirds of the time, simply because markets rise more often than they fall. What DCA actually buys is participation: it keeps people investing through drawdowns they would otherwise sit out, and for anyone investing out of a paycheck it is just the default shape of reality.
You put $500 into an index fund monthly for four months at prices of $50, $40, $25, and $50. You accumulate 10 + 12.5 + 20 + 10 = 52.5 shares for $2,000, an average cost of $38.10 versus an average price of $41.25. The $25 month, the one that felt worst to buy, contributed 38% of your shares and most of the eventual gain when the price recovered.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.