Dollar-cost averaging: the mechanics
Same contribution. Different number of shares.
Regular equal contributions buy different quantities as prices change. Learn the arithmetic, then test what happens when prices keep falling.
Choose a schedule, understand the exposure
Dollar-cost averaging means investing the same amount at regular intervals. Lower prices buy more shares; higher prices buy fewer. A schedule determines when money enters the investment, but does not change the risks of the investment itself.
Count shares before averaging the cost
Imagine three $100 purchases at prices of $100, $50 and $100 per share. They buy one, two and one shares: four shares for $300. The average cost is $75 per share, calculated as total spending divided by total shares. Averaging the three quoted prices would give a different answer. Fractional shares are assumed; fees and taxes are excluded.
A lower average cost is not a profit guarantee
If the final price is below the average cost, the position is worth less than the money invested. Try the falling-price path below. Contributions from future income also differ from gradually investing cash already available: the latter leaves some money uninvested between purchases. This example does not establish which schedule will do better in future markets.
Follow three equal purchases
Invest a hypothetical $100 at each monthly price. Fractional shares are allowed; fees, taxes and dividends are excluded.
| Month | Price | Shares bought |
|---|---|---|
| 1 | $100.00 | 1.0000 |
| 2 | $50.00 | 2.0000 |
| 3 | $100.00 | 1.0000 |
- Total contributed
- $300.00
- Average cost per share
- $75.00
- Value at final price
- $400.00
This path ends above the amount contributed. Another path can lose money; these invented prices are not a forecast.
Shares shown to four decimals; calculations use unrounded quantities. Average cost = contributions ÷ total shares.Three $100 purchases buy four shares in total. What is the average cost per share?
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