Dollar Cost Averaging
Dollar cost averaging is the practice of buying fixed dollar amount on regular basis over long periods of time, regardless of the market value of a share. The investor buys more shares at select time intervals or for a fixed amount rather when the market price goes up or down. This is also known as the constant dollar plan.
An illustration stated by Simon Hardie, chartered accountant and owner of the Shape of Money website.
You invest a standard amount each month of $100
Buy shares at the price of $1/share
Buy shares at price of $0.80 per share
Buy shares at price of $0.65 per share
Buy shares $1.25 per share.
You own 459 units. The units costs $1.25 and your total investment is worth $574.The cost of 459 units over four months was $400 at average price of $0.87 per share.
Some thoughts evaluating whether DRIPs are the right investment option:
DRIPs are the sensible way for the investors to take advantage of Dollar Cost Averaging on top of it, Dollar Cost Averaging advantage does not include extra potential yield earned from dividends.