Dollar cost averaging is a simple, effective strategy for long-term investors to accumulate shares in the stock market over time. Rather than investing a lump sum all at once, you make regular, consistent purchases of the same dollar amount. This approach can help mitigate risks and volatility for new investors.

When stock prices fluctuate, dollar cost averaging means your fixed investment amount buys more shares when prices are low and fewer shares when prices are high. Over the long run, this averages out your cost per share and allows you to take advantage of market downturns.

For example, say you invest $500 per month in an S&P 500 index fund. One month the fund is trading at $100 per share, so you buy 5 shares. The next month it drops to $80 per share, so your $500 buys you 6.25 shares. Your average cost per share over those two months is $90 even though you paid $100 and $80.

This strategy works best for investments you plan to hold for many years, ideally decades. It smooths out short-term volatility and market timing pressures by focusing on consistent, regular purchases. You accumulate more shares over time at a lower average cost.

Dollar cost averaging is a good approach for beginner investors who want to enter the market gradually without trying to “time the market” for the perfect entry point. It reduces the risk of investing a lump sum only to see prices drop shortly after.

The benefits are:

• Lower average cost per share over time

• Reduced risk compared to lump sum investing 

• Disciplined, systematic savings approach

• Ability to take advantage of market downturns

• Simplicity – no market timing or stock picking required

The main potential downside is missing out on gains if you invest during a sustained bull market. But for long-term investors, dollar cost averaging is a proven strategy to accumulate wealth in the stock market at a reasonable cost.