What Is Dollar-Cost Averaging?

Dollar-cost averaging basically means that you invest a certain amount of money at specific intervals over a period of time, usually years. This means that if you are investing in stock, the price of the stock you are buying will go up and down; when the price is down, your fixed amount buys more shares. Conversely, when the price of the stock rises, your regular investment buys fewer shares.

Over time, theorists say that the price per share generally averages out, insulating your investment against fluctuations in market value. By establishing an automatic investment plan that takes advantage of dollar-cost averaging, you can also avoid overreacting to changes in stock price (as well as the risks associated with playing the market).

Though the market certainly has crests and troughs, the overall value has persistently risen–dollar-cost averaging is a simple idea that may help you achieve your financial goals.