Chapter 4: Basic Market Strategies
Dollar-cost averaging is a strategy where you invest a fixed amount of money at regular intervals into a stock, regardless of its price. This approach averages out the purchase price over time, hence the name.
Dot=Buying Points
Why would you want to average out your price?
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There is also a higher return potential with dollar cost averaging. For instance, if a stock temporarily peaks at $100, then drops to $80, and later climbs to $150, buying only at $100 would give you a 50% gain. However, if you bought at both $100 and $80, you would lower your average cost to $90, resulting in a 66% gain when the stock reaches $150.
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Averaging out your purchase price helps reduce the impact of high spots in your stock buys. For example, if a stock temporarily peaks at $100 and then drops to $80, using all your money to buy at $100 would result in a 20% loss. However, if you used half of your money to buy at $100 and the other half at $80, your average purchase price would be $90. This way, you would only be down about 11%.