What does Dollar Cost Averaging Mean?
Dollar Cost Averaging or DCA is an investment strategy in which one buys smaller quantities of an asset at regular periods. It is also called Constant Dollar plan, Unit Cost Averaging, Incremental Trading, or the Cost Average Effect
. For this, an investor divides the total investment amount into equal small parts and invests them in intervals. This is in contrast to lump-sum investing. In which, one buys an asset at once with the total investment amount.
Let us consider an example:
Tom wants to invest $50000 in cryptocurrency XYZ. Below is a comparison of buying XYZ using Lump-sum and DCA over a five-month window.