Dollar-cost averaging (DCA) is an investment strategy that can even-out the investment price fluctuations over time. It works by buying the same dollar amount of shares at regular intervals, rather than buying the same number of shares each time.
- By buying the same dollar amount of shares in an investment each period, when the price goes up, fewer shares are purchased; when the price goes down, more shares are purchased.
- By using DCA, the investor doesn't have to try to find a low purchase price. Share prices tend to average out over time, and can produce an acceptable profit as long as the ending value of the shares is higher than the dollar-cost average. But that is not guaranteed.
DCA is most commonly used to purchase mutual fund shares on a regular basis, and can be an effective strategy when used with variable annuity equity-based options.
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