Dollar-cost averaging
DCADollar-cost averaging is investing a fixed dollar amount on a fixed schedule, whatever the price is on each date. Because the amount is constant, more shares are bought when the price is low and fewer when it is high, so the average cost per share comes out below the average of the prices paid.
What is dollar-cost averaging?
The schedule fixes two things: the amount, say $500, and the interval, say the first of each month. The number of shares each purchase buys is the amount divided by that day's price, so it changes from one date to the next.
The arithmetic follows from the fixed amount. At $25 a share, $500 buys 20 shares; at $50, it buys 10. The low-price dates put more shares into the holding than the high-price dates do, which is why the average cost per share, the total spent divided by the total shares, sits below the plain average of the prices whenever the prices differ.
A holding built this way is a set of lots, one per purchase, each with its own date, share count and cost. A payroll contribution to a retirement account is the common form of it: the same dollar amount each pay period, bought at whatever the fund's price is that day.
How dollar-cost averaging works, with numbers
$500 is invested on the first of four months, at share prices of $50, $40, $25 and $40. The four purchases buy 10, 12.5, 20 and 12.5 shares: 55 shares for $2,000.
The average cost per share is $2,000 ÷ 55, which is $36.36. The average of the four prices is $155 ÷ 4, which is $38.75. The $2.39 gap comes from the weighting: at $25, the same $500 bought twice the shares it did at $50, so the $25 price carries twice the weight in the cost per share that the $50 price does, where the plain average weights the two equally.
- Month 1, $500 ÷ $50
- 10 sh
- Month 2, $500 ÷ $40
- 12.5 sh
- Month 3, $500 ÷ $25
- 20 sh
- Month 4, $500 ÷ $40
- 12.5 sh
- Total, 55 sh for
- $2,000
- Average of the four prices, $155 ÷ 4
- $38.75
- Average cost per share, $2,000 ÷ 55
- $36.36
Why dollar-cost averaging matters
The average cost per share is the holding's cost basis per share, and the basis is what a later sale's gain or loss is measured from. For the 55 shares in the example, the basis is $2,000 whatever the price does next; at a sale price of $40, the gain is $200, and at $30 it is a $350 loss.
The gap between the two averages measures how the fixed amount weighted the purchases. It is not a return: it says nothing about where the price went after the last purchase. Two schedules over the same four prices in a different order buy the same 55 shares for the same $2,000.
Because the purchases arrive as separate lots, each with its own date, the holding period and the gain run per lot. In the example, a sale a year and a day after the first purchase is long-term on the first 10 shares and short-term on the rest.
Dollar-cost averaging in Taiga Finance
Taiga Finance makes no purchases, so it has no dollar-cost averaging feature. A schedule set up at the brokerage shows up on its own once the account is connected: each purchase lands as a lot in the holding's drawer in Investments, with its date, shares, value and gain, and the “Cost basis” worksheet adds the lots up.
The monthly amount can be planned as well. An Investments line on the Plan carries a planned monthly amount linked to the investment account and reads what has been funded against it this month.
Plan & goals →Key takeaways: Dollar-cost averaging
- Dollar-cost averaging is a fixed dollar amount invested on a fixed schedule; the share count each purchase buys is the amount divided by that day's price.
- The average cost per share, total spent divided by total shares, sits below the average of the prices whenever the prices differ, because the low-price dates bought more shares.
- The gap between the two averages describes how the purchases were weighted. It is not a return and says nothing about the price after the last purchase.
- Taiga Finance makes no purchases. A schedule run at the brokerage shows up in a connected account as lots in the holding's drawer, and an Investments line on the Plan tracks the monthly amount against what has landed.
Questions about Dollar-cost averaging
What is dollar-cost averaging?
Investing the same dollar amount at regular intervals, whatever the price is on each date. More shares are bought when the price is low and fewer when it is high, so $500 a month over prices of $50, $40, $25 and $40 buys 55 shares at an average cost of $36.36, against an average price of $38.75.
Why is the average cost per share lower than the average price?
Because a fixed amount buys more shares at a low price than at a high one, the low prices count for more shares in the total. Total spent divided by total shares weights each price by the shares bought at it; the plain average of the prices weights them equally. The two are equal only when the price is the same on every purchase date.
Does Taiga Finance do dollar-cost averaging?
No. It makes no purchases. A schedule run at the brokerage shows up in a connected account as a lot per purchase in the holding's drawer, with its date, shares, value and gain, and an Investments line on the Plan tracks the planned monthly amount against what has been funded.