Saving & investing
What Is Dollar-Cost Averaging? Example and Limitations
Dollar-cost averaging means investing the same amount of money at regular intervals regardless of the current market price.
Also called: DCA; Regular fixed-amount investing.
How it works
A fixed contribution buys more shares when prices are lower and fewer when they are higher. This makes the investment schedule consistent without requiring a price forecast. Investing new income as it arrives and gradually investing cash already available have different opportunity costs: money waiting in cash misses both gains and losses in the investment.
Average purchase cost per share = total money invested / total shares purchased
For each purchase, shares = contribution / share price. The average cost is weighted by the number of shares bought, not a simple average of the purchase prices.
$120 invested on each of three dates
Assume fractional shares are available and buy the same investment each time.
- First purchase at $12 per share: $120 / $12 = 10 shares.
- Second purchase at $10 per share: $120 / $10 = 12 shares.
- Third purchase at $8 per share: $120 / $8 = 15 shares.
You invest $360 and own 37 shares, at an average cost of about $9.73 each. At the final $8 price, those shares are worth $296: a $64 loss.
Three purchases; fractional shares allowed; no fees or dividends. Prices are hypothetical and are not a forecast.
Buying more shares at lower prices does not guarantee a profit
Losses remain possible, as the example shows. Phasing in a lump sum can also trail investing it immediately when prices rise. Our Investment Calculator estimates regular-contribution growth at an assumed constant return; it does not replay share prices or calculate the share-weighted cost shown above.
Explore with a calculator
- Investment Calculator
Estimate balances from regular contributions using a hypothetical constant return. This is a contribution projection, not a share-price DCA backtest.
- 401K Calculator
Explore recurring payroll contributions and an assumed employer match in a retirement projection.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms