Dollar cost averaging is the method by which an investor purchases smaller amounts of assets over a long period of time vice investing in one large lump sum.  This technique allows the investor to buy fewer shares when the price is high and many shares when the price is low.  This lowers the risk of investing a large amount at once only to have the security's price plummet.

 

Another benefit of DCA is that the investment amounts can usually be withdrawn directly from the bank account or paycheck in amounts small enough to have little effect on the day-to-day life of most people.  This strategy is mostly used with mutual fund investing although one online stock brokerage has this feature as well.  ShareBuilder is a great site for the novice investor or for those looking for an automatic investment plan.

 

DCA is widely criticized by financial experts who claim that DCA does not provide large overall returns nor reduce the risks when compared with other systems.  However, DCA is perfect for those who cannot afford $5000 for a lump sum investment ( 200 shares at $25/share ).