The maths
The amount is fixed and the price changes. When the price is lower, the same amount buys more shares; when it is higher, fewer. In the idealised model, investing the full amount each time with no costs and no limit on share counts, your average cost per share usually comes out below the simple average of the prices you paid, and equals it only if every price was the same, because the cheaper months carry more weight in the share count.
When does it make sense?
The approach usually suits someone who receives income every month anyway, has a long horizon, and does not want to bet on entry timing. It looks more sensible when applied to something diversified, such as a mutual fund or a group of stocks, rather than a single stock.
And when not?
If the stock is falling because the company is weakening, averaging in will not fix that; it only has you buy more of something losing value. If the amounts are small, commissions and any minimum fee per trade can eat a noticeable share of them, so ask your brokerage firm about its fees before setting the amount. And if you have the full sum today and the market rises afterwards, investing it at once would have done better. Averaging in reduces the risk of bad timing; it does not guarantee the best outcome.
Look at the funds
If a fixed amount into something diversified appeals to you, open the mutual funds page and look at the available funds and their performance over different periods.
Check yourself
1. You invested EGP 1,000 once at 10 and once at 5. How many shares do you have?
2. In which case does averaging in not solve the problem?
Summary
- Dollar-cost averaging is a fixed amount on fixed dates, so you buy more shares when prices are lower.
- It usually makes sense with monthly income, a long horizon and a diversified holding, and it reduces timing risk.
- It does not fix a weakening company, and fees on small amounts can eat into them.