Wondering what dollar-cost averaging is and if it’s the right strategy for you? This is a question many new and seasoned investors ask when looking for ways to grow their money with minimal risk. By investing consistently over time with this strategy, you can reduce the impact of market ups and downs while focusing on long-term growth. Here’s what you need to know about dollar-cost averaging.
Dollar-cost averaging is an investing 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.
Often used with index funds like the S&P 500 or the Nasdaq Composite, this strategy reduces the impact of market volatility and removes the need to time your purchases perfectly.
Let’s say you decide to invest $1,000 in stock ABC on the first of every month for five months. Assume the following table indicates how the price of the stock moves in the first five 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 $19.90 per share (total amount invested / total number of shares owned = average price per share), which is almost the same as the original 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.
One of the easiest ways to apply the dollar-cost averaging strategy is by setting up automatic contributions to a tax-free savings account (TFSA) or registered retirement savings plan (RRSP). Then, you can use the money to buy ETFs, index funds or individual stocks on a consistent schedule. Any growth in a TFSA is tax-free, while RRSP earnings are tax-deferred.
You can also use a stock trading account. Many brokerages, like Questrade or Qtrade Direct Investing, offer commission-free trades for stocks and ETFs, making it easier for you to get started. You can even set up automatic monthly investments, so you don’t forget.
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The frequency of your investments depends on your budget, goals and the account you’re using.
Investors use dollar-cost averaging as it has plenty of advantages, including:
While there are plenty of benefits of dollar-cost averaging, there are some risks as well, such as:
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 Investing | $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.
To make comparing even easier we came up with the Finder Score. Trading costs, account fees and features across 10+ stock trading platforms and apps are all weighted and scaled to produce a score out of 10. The higher the score, the better the platform—it's that simple.
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.
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