Dollar-Cost Averaging |
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Method of purchasing securities whereby purchases are spaced out over a period of time, thereby buying separate lots of the same security at various prices. Usually, a set dollar amount is invested, thereby purchasing more shares of the security when the price is lower ($100 buys 5 shares of XYZ stock when it trades at $20/share) and fewer shares of the security when price is higher ($100 buys 4 shares of XYZ stock when it trades at $25/share). The following is an example of dollar-cost averaging: On July 1, Mr. Smith invests $1,000 into the XYZ mutual fund. The price is $20 per share, so he buys 50 shares. On August 1, Mr. Smith invests $1,000 into the XYZ mutual fund. The price is now $25 per share, so he buys 40 shares. On September 1, Mr. Smith invests $1,000 into the XYZ mutual fund. The price is now $18 per share, so he buys 55.55 shares. Mr. Smith now owns a total of 145.55 shares of the XYZ mutual fund, at an average cost of $20.61 per share. | |||