So many people want to invest but they never get started because they’re afraid of jumping into the market at the wrong time. This is a valid concern; no one wants to lose money. So what is it?

Dollar Cost Averaging is a simple technique employed to mitigate the risk of investing a large sum of money at the “wrong time”. It is accomplished by purchasing a certain fixed dollar amount of some particular investment at set regular intervals.

Because you’re always investing the same dollar amount, you’ll be buying more shares when the price is low and fewer shares when the price is higher. This strategy has an averaging effect on your cumulative purchase price that actually favors the lower price.

Let’s take an example.

We’re going to invest $500 a month in XYZ Corporation. In the first month the stock is trading at $20 which allows you to purchase 25 shares. Next month the stock is trading at $10 per share and you’re able to buy 50 shares.

At first glance, you might expect the average price to be $15, but this isn’t the case. After two months, you’ve invested $1,000 and have purchased 75 shares. This comes out to $13.33 per share. This is due to the fact that you’re not only buying shares at different prices but also different quantities.

This strategy works really well for people wanting to get started investing because they may not have a lump sum to invest in the first place. Consistent use of this strategy is a great way to reduce your investment risk.

So what’s holding you back from getting started?

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