What is Dollar Cost Averaging?

When you’re starting to look at theory related to the stock market, you’re going to find that there are a lot of different things that you can try to do. Dollar Cost Averaging is one of the more common methods that investment firms montana use when making safety nets for investments. 

By definition, the strategy is fairly simple. You determine a certain amount of money that you invest in certain intervals. Sounds easy enough, right? Well, there are some implications to it. Let’s use the following example to simplify the assumptions made by dollar-cost averaging.

Say you determine that you are going to spend approximately $100 a month on stocks. So, on the 1st of every month, you spend $100 on different stocks in order to build your portfolio. One month, the stocks you buy are approximately $10 each, so you buy 10 of them. The next month, they’ve gone up to $25 a stock, meaning you can only buy 4 of them.

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The essential point of dollar-cost averaging is to minimize the risk by being dependant on the average cost of the stocks, rather than the price of each individual stock. In the example above, you wouldn’t pay attention that some stocks were $10 and some were $25, you’d care that you got 14 stocks at an average cost of $14.29.

Now, why would you do this? Some people suggest that it minimizes the risk. How? Because you aren’t taking the risk of making a huge investment all at once. Instead, you are investing little by little, diversifying your portfolio, but averaging your cost out so that you are eventually paying a smaller amount per share than you would have to start with. It’s believed that it safeguards you when the economy crashes or other issues come along.