Promoted
National Bank Direct Brokerage
- Commission-free trading
- Several account types available
- Access to array of research tools
Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
Investing strategies: How dollar-cost averaging can make you money
Dollar-cost averaging takes the guesswork out of timing the market. But it comes with risks.
There’s no right or wrong way to strategize when it comes to investing. But dollar-cost averaging might be right for you—particularly if you can trust your stocks and funds to increase in value over time. Here’s what you need to know about dollar-cost averaging.
What is dollar-cost averaging?
Dollar-cost averaging is an investment strategy that involves contributing a fixed amount to a fund or stock portfolio at regular time intervals, regardless of stock prices or market movements at any given time.
When the prices of your chosen stocks or funds go up, your fixed investment will buy fewer shares. When prices go down, it nets you more shares and reduces your average cost per share over time. This way, your investment isn’t as highly impacted by volatility as it would be if you purchased all your shares in one lump sum.
This is often practiced with index funds, so that you’re dropping money into the S&P 500 or the Nasdaq Composite regardless of the price at the moment. You’re betting that markets go up over time.
Dollar-cost averaging removes the guesswork that comes with timing the market or any group of stocks and buying at the right time.
Using dollar-cost averaging
Let’s say you decide to invest $1,000 in stock ABC on the first of every month for 5 months. Assume the following table indicates how the price of the stock moves in the first 5 months.
| Month | ABC stock price | Shares purchased | Shares owned | Value of investment |
|---|---|---|---|---|
| January | $20 | 50 | 50 | $1,000 |
| February | $18 | 55.55 | 105.55 | $1,899.90 |
| March | $21 | 47.62 | 153.17 | $3,216.57 |
| April | $19 | 52.63 | 205.8 | $3,910.20 |
| May | $22 | 45.45 | 251.25 | $5,527.50 |
By May, a total investment of $5,000 ($1,000 X 5 months) is worth $5,527.50. Had you decided to invest that total at any one of those months, your investment might have ended up higher or lower. In this case, the average price of the stock was the same as the purchase price. But it’s lower than the stock’s highest price.
By using a dollar-cost averaging strategy, you reduced the impact of volatility in the stock price over time.
Benefits of dollar-cost averaging
Dollar-cost averaging steers you away from the risk of market timing. Because you’re investing a fixed amount at different intervals regardless of share price, you avoid emotional investing or buying more shares as prices rise and panic selling when they drop. Dollar-cost averaging keeps you on a steady, long-term investing strategy.
Dollar-cost averaging is so well-regarded, it’s used in retirement planning. If you own a RRSP, you’re already doing it. Your employer takes a fixed amount of money out of your income every payday and invests it in the stocks or funds you’ve chosen for your RRSP.
Risks of dollar-cost averaging
Succeeding in dollar-cost investing assumes stock prices will rise, at least in the long run. But prices are constantly moving, and nobody can predict with absolute certainty where prices may be heading. So, engaging a dollar-cost averaging strategy on a stock you know little about can be especially risky. You may end up buying more stocks at a time when exiting would be more suitable.
That’s why dollar-cost averaging may be more suitable for index funds or mutual funds, which invest in a variety of stocks. But in either case, it’s crucial to examine the fundamentals of any investment before employing a strategy.
Moreover, dollar-cost averaging is best used as a long-term strategy. While markets are in constant flux, prices generally don’t change much in the short term. You have to keep your dollar-cost averaging strategy in play through a long period to benefit from the low prices of a bear market and the high prices of a bull market. Either can last several months or even years.
Promoted
Finder Award
Interactive Brokers
- Access to international stock exchanges
- Low margin rates
- Powerful research tools
Automatic investing plans
Many brokers provide automatic investing plans. These strategies allow you to contribute fixed amounts of money automatically from your bank account to securities such as a mutual fund at set time intervals. Here are some popular picks.
| Broker | Account minimum | Fees | Highlight |
|---|---|---|---|
| Wealthsimple | $0 |
| Buy and sell cryptocurrencies with Wealthsimple Crypto |
| CIBC Investor's Edge | $0 |
| Special pricing for students and active traders |
| Qtrade Direct Investing | $0 |
| Lots of research tools |
| Moka app | $0 |
| Rounds up your purchases to the nearest dollar and invests the change in ETFs |
| Justwealth robo-advisor | $5,000 (no minimum for RESP accounts) |
| Low management expense ratio |
Before you kick off your dollar-cost averaging strategy, you’ll need to open a stock trading account with a broker. Here are some of your choices.
Compare stock trading accounts
1 - 5 of 5
Bottom line
Dollar-cost averaging is the process of dividing your total investment in a stock or fund into fixed investments at set time intervals. When done correctly, this strategy can help hedge against volatility and earn strong profits in the long run. Before you invest, compare stock-trading platforms to find one that’s right for you.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
You might also be interested in...
How do ETFs work?
Your guide to how ETFs work and whether this type of investment is right for you.
Read more…
Best stock app for beginners for 2023
The best stock trading app for beginners is easy to use and offers free trades.
Read more…
How to read stock charts
Learning how to read stock charts and recognize chart patterns can unlock your success as a trader.
Read more…
3 upcoming IPOs to watch in June 2023
Several medical research and health care companies — including a J&J spinoff — are expected to go public this month.
Read more…
What are stocks?
Owning a stock means you own part of a company and can potentially grow your wealth. But there is a risk of loss.
Read more…
Best time to buy stocks
The best time to buy stocks could be right after an IPO, during expansion periods or when other investors are buying or selling.
Read more…
More guides on Finder
-
Best bad credit loans in PEI
Compare some of the best bad credit loans in PEI.
-
Credito review
Your guide to the features, interest rates and fees to expect when you apply for a short-term loan with Credito.
-
5 apps like Bree in Canada
Pay for unexpected bills and avoid overdrafts when you sign up for apps like Bree.
-
Debt Relief Canada (reliefcanada.ca) review
Take a closer look at the debt relief solutions, features and fees of Debt Relief Canada.
-
Desjardins Online Brokerage (Disnat) review 2023
Learn more about Desjardins Online Brokerage (Disnat) to see if it’s the right broker for you.
-
Guide to finding the best prepaid card in Canada in June 2023
We show you the best prepaid credit cards in Canada, whether you’re looking for a prepaid card with no fees, cash back rewards, or travel perks, or more.
-
How to buy Sui (SUI) in Canada
This guide provides step-by-step instructions on how to buy Sui, lists some exchanges where you can get it and provides daily price data on (SUI).
-
5 apps like Nyble in Canada
Compare apps like Nyble in Canada to access emergency funding.
-
RightRide review
Your guide to buying and financing a car in Canada with RightRide.
-
Compare bad credit car loans in BC
Your guide to bad credit car loans in BC and how to find the right financing for your needs.