What is dollar-cost averaging and why might an investor use it?

• A. Investing a fixed amount at regular intervals to reduce the impact of market timing and average purchase price over time.
• B. Investing a large lump sum only when prices are high.
• C. Investing in only one asset class.
• D. Timing the market perfectly.

Answer: (B)

Dollar-cost averaging is investing a fixed dollar amount at regular intervals, regardless of the share price. This approach helps you avoid trying to time the market and tends to smooth your overall purchase price over time. When prices are low, your fixed investment buys more shares; when prices are high, it buys fewer. Over the long run, this can lower the average cost per share and build wealth steadily.

Investors use it to stay disciplined, reduce emotional decision-making, and invest consistently—even when markets are volatile or you’re unsure what prices will do next. The other ideas describe lump-sum investing based on market conditions, or focus on diversification or perfect timing, which are not what dollar-cost averaging represents.