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Trading and Investment Terms

Dollar Cost Averaging

Dollar-cost averaging is a tool an investor can use to build savings and wealth over a long period. 

It is also a way for an investor to neutralize short-term volatility in the broader equity market. 

A perfect example of dollar-cost averaging is its use in 401(k) plans, in which regular purchases are made regardless of the price of any given equity within the account.

  • Dollar-cost averaging refers to the practice of dividing an investment of equity up into multiple smaller investments of equal amounts, spaced out over regular intervals.
  • The goal of dollar-cost averaging is to reduce the overall impact of volatility on the price of the target asset, as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility.
  • Dollar-cost averaging aims to avoid making the mistake of making one lump-sum investment that is poorly timed concerning asset pricing.

 

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