Dollar-Cost Averaging Worked Example: Why Your Average Cost Is Lower Than the Average Price
October 21, 2026
Dollar-cost averaging (DCA) means investing a fixed dollar amount at regular intervals regardless of price. When prices are high, the fixed amount buys fewer shares; when prices are low, it buys more. The result is that your average cost per share is lower than the simple average of the prices at which you bought. It is a mathematical feature of buying equal dollar amounts, not a guarantee of profit.
Here is a five-month example. You invest $500 each month. The share price is $50 in month 1, $40 in month 2, $25 in month 3, $40 in month 4, and $50 in month 5. The simple average of the prices is $41. But your purchases are 10, 12.5, 20, 12.5, and 10 shares, a total of 65 shares for $2,500. Your average cost is $2,500 ÷ 65 = $38.46.
Skip the math and get your answer instantly:
Open the Investment Calculator →The Calculation Month by Month
Shares bought = $500 ÷ price. Month 1: 500 ÷ 50 = 10. Month 2: 500 ÷ 40 = 12.5. Month 3: 500 ÷ 25 = 20. Month 4: 12.5. Month 5: 10. Total shares = 65. Total invested = $2,500. Average cost = $38.46 per share. At the end, the price is back to $50, so the portfolio is worth 65 × $50 = $3,250, a gain of $750, or 30%. An investor who put the full $2,500 in at month 1 at $50 would own 50 shares worth $2,500 at the end, a 0% return, even though the price ended where it began. The DCA investor profits because more shares were bought at low prices.
| Month | Price | Amount invested | Shares bought |
|---|---|---|---|
| 1 | $50 | $500 | 10.0 |
| 2 | $40 | $500 | 12.5 |
| 3 | $25 | $500 | 20.0 |
| 4 | $40 | $500 | 12.5 |
| 5 | $50 | $500 | 10.0 |
| Total | Average price $41 | $2,500 | 65.0 (avg. cost $38.46) |
Why the Average Cost Is Lower
Your average cost is the harmonic mean of the prices, which is always less than or equal to the arithmetic mean. With n equal dollar purchases, average cost = n ÷ (1/p₁ + 1/p₂ + ... + 1/pₙ). Here: 5 ÷ (0.02 + 0.025 + 0.04 + 0.025 + 0.02) = 5 ÷ 0.13 = $38.46. The more volatile the price, the bigger the gap. If the price never changed, the two averages would be equal. The effect arises because you naturally buy more when the price is lower.
This does not mean DCA always beats other methods. If the price rises steadily, a lump sum invested at the start would have bought more shares at the lowest price.
What DCA Does and Doesn't Do
DCA reduces the risk of investing all your money at a peak, and it removes the need to time the market. It suits people who invest from regular income, like paycheck contributions to a retirement plan. It does not guarantee a profit or protect against loss in a falling market: if the price in the example had fallen to $25 and stayed there, the 65 shares would be worth $1,625, a loss. Historically, lump-sum investing has outperformed DCA about two-thirds of the time because markets rise more often than they fall, but DCA can feel safer and helps build the habit of investing.
Practical Tips
Automate the investments so that you keep investing in down markets, which is when DCA does the most work. Invest in diversified funds rather than a single stock, which could fall and never recover. Keep costs low: fixed trading commissions on small purchases can eat up the benefit, so use commission-free platforms or choose a longer interval. Rebalance occasionally and increase contributions as income grows.
Frequently Asked Questions
Why is my average cost lower than the average price in DCA?
Because a fixed dollar amount buys more shares when prices are low, so your cost is a harmonic mean of the prices.
Does DCA guarantee a profit?
No. If prices fall and stay down, you will still have a loss.
Is DCA better than lump-sum investing?
Lump sum has historically done better about two-thirds of the time, but DCA reduces timing risk.
How do I calculate my average cost per share?
Divide total dollars invested by total shares bought.
Do 401(k) contributions use DCA?
Yes. Regular paycheck contributions buy shares at varying prices.