The key to dollar cost averaging is regular, steady investments over time.
When the price per share is high, your investment buys fewer shares. But, when the price per share is low, the investment buys a greater number of shares. This strategy is particularly useful when dealing with a fluctuating market. However, always remember that there is no guaranteed return on variable investments.
Dollar cost averaging does not assure a profit and does not guarantee against loss in a declining market. It depends on continuous investment in the security regardless of fluctuating price levels and requires that you be able to continue your purchase through periods of low price levels.
Example:
| Month | Amount Invested | Cost per Share | No. of Shares |
|---|---|---|---|
|
March
|
$100
|
$20.00
|
5
|
|
April
|
$100
|
$25.00
|
4
|
|
May
|
$100
|
$10.00
|
10
|
|
June
|
$100
|
$50.00
|
2
|
| Average cost per share |
$19.05
|
21
|
|
Note from the example that the average cost per share was $19.05. That is the average cost of each share over the four-month period. You can see how holding a steady course through dollar-cost averaging can even out the purchases.
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