Dollar-cost averaging is an investment strategy where an investor regularly invests a fixed amount of money into an asset or portfolio over time. Instead of investing a large amount at once, the investment is spread across multiple moments.
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Dollar cost averaging reduces the impact of market timing.
Because the same amount of money is invested each time, investors automatically buy more units when prices are low and fewer units when prices are high. Over time, this can lower the average purchase price of the investment. Many long term investors use this strategy to reduce the risk of investing a large sum just before a market decline and to build investments gradually.
Short example:
Suppose an investor decides to invest $500 in a stock every month.
In the first month the stock price is $50, so the investor buys 10 shares.
In the second month the price falls to $25, allowing the investor to buy 20 shares with the same $500. Over time, the investor accumulates shares at different prices, which can reduce the average cost per share.
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