# Dollar-cost averaging

Dollar-cost averaging is an investment schedule that puts a fixed dollar amount into an asset at regular intervals, regardless of its price, so the amount purchased varies.

## What it means

A fixed contribution buys more shares when the price is lower and fewer when it is higher. Dollar-cost averaging (DCA) sets the contribution amount and timing in advance rather than making each purchase amount depend on the latest price. For example, someone might allocate US$100 on the first trading day of each month.

DCA describes *when and how much* to invest, not which asset to choose or whether that asset is suitable. It does not prevent losses. It also differs from averaging down: averaging down specifically adds to a position after its price has fallen, while a DCA schedule continues through both rising and falling prices.

## How it is calculated

For purchases without fees, calculate the shares acquired at each interval, then divide total money invested by total shares acquired:

`S_i = C_i / P_i; A = (Σ C_i) / (Σ S_i)`

- `S_i` = shares purchased at interval `i`, measured in shares.
- `C_i` = contribution invested at interval `i`, measured in US$.
- `P_i` = purchase price at interval `i`, measured in US$ per share.
- `A` = average purchase cost, measured in US$ per share.
- `Σ` = sum across all purchase intervals.

If each contribution is the same, `C_i` is fixed, but `S_i` changes with the price. The formula assumes fractional shares are available; otherwise, unspent cash and whole-share purchases must be tracked separately. For a cost basis that includes trading fees, add those fees to the total amount paid before dividing by shares acquired. The resulting average cost is not the arithmetic average of the quoted prices.

## Worked example

The following prices and purchases are hypothetical. Assume fractional shares are available, all three purchases fill at the stated prices, and there are no fees.

| Month | Contribution | Price per share | Shares purchased |
| --- | ---: | ---: | ---: |
| 1 | US$100 | US$10 | 10 |
| 2 | US$100 | US$5 | 20 |
| 3 | US$100 | US$10 | 10 |

1. Total contributions are US$100 × 3 = US$300.
2. Total shares are 10 + 20 + 10 = 40.
3. Average purchase cost is US$300 ÷ 40 = US$7.50 per share.

The arithmetic average of the three prices is US$8.33 per share, but that is not the investor’s average cost: the US$5 purchase acquired more shares. At the end of month 3, a hypothetical US$10 share price would value 40 shares at US$400 before any selling costs or taxes. That outcome depends entirely on these assumed prices; another price path could produce a loss.

## Why it matters before you trade

A schedule can make the timing of contributions consistent, but each scheduled purchase is still a trade. Before placing one, consider the order size, bid-ask spread, potential market impact, and any broker charges. Repeated small orders can accumulate costs; a fixed contribution does not mean a fixed number of shares or a fixed execution price.

Also consider the resulting portfolio. Regular purchases of one stock can increase concentration even when each purchase is small. If cash is already available, spreading purchases over time leaves some of it uninvested between dates; compared with investing it all immediately, the result depends on the subsequent price path. Neither approach guarantees a better outcome.

## How PreTrAIde uses it

The product facts do not state that PreTrAIde creates or manages a dollar-cost-averaging schedule. Its pre-trade analysis instead checks a user-built stock basket before an order is placed. For a planned purchase, the user can enter a stock, buy side, quantity, and execution conditions; PreTrAIde returns a GO, NO-GO, or MODIFY verdict with a risk assessment, suggested execution strategy, and plain-language reasoning. Its quantitative layer estimates factors including spread, participation in daily volume, market impact, and portfolio concentration. These verdicts support a decision; they are not recommendations. The user places any trade through their own broker.

## Common mistakes

- **Treating DCA as protection from losses.** Buying at several prices does not stop the asset’s value from falling.
- **Averaging the prices instead of the costs.** Divide total amount paid by total shares acquired.
- **Ignoring execution costs.** Spreads, impact, and fees can change the effective cost of each purchase.
- **Assuming a scheduled order always fills as planned.** Execution conditions, available liquidity, and broker rules can affect the shares actually acquired.
- **Overlooking concentration.** A repeated contribution can make one holding a larger share of the portfolio.

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Source: https://pretraide.com/glossary/dollar-cost-averaging