Drip Drop Investing!
Jan 03 '01
A great way for young,inexperienced, or apprehensive investors to start to accumulate some equity in corporations is through a great program offered by many large companies called DRIP's. These DRIP's ( which is short for dividend reinvestment plans ) are tremendous tools to utilize to build up your newly emerging portfolio for a number of reasons. Your funds are invested in shares of stock of a company and then any dividends are reinvested back into more shares of the stock. These are offered and run directly with the company and are not held through a brokerage house. Usually, a stock certificate will be issued to the investor although they also can be held directly with the transfer agent as well in book form.
Advantages
Firstly, there are usually no transaction fees involved. The investor can make regular periodic contributions and not have to pay commissions. Second, the beautiful advantage of dollar cost averaging can be liberally applied to your investment. The principle of dollar cost averaging is basically the ability to get more shares when a stock is low and then when the stock price increases the fact that you had more shares earlier increases your overall investment. Over the long term, dollar cost averaging allows you to but more shares at a lower price with less risk because of the even payments over time. Third, there is not as much risk involved as many of the companies over DRIP plans are stalwarts in their industries. Finally, since dividends are reinvested income is deferred by you until the shares are sold.
The Problems
Dividend reinvestment plans are a logistic nightmare in terms of cost basis. You have to ascertain each stock purchase and reinvestment dividend purchase of stock share price in order to accurately calculate cost basis. This will have to be done upon disposal of your stock. Get out the paper and pen at that point! Second, not much flexibility.
Unlike a typical brokerage account, where you can sell and buy something else right away, if you have a stock certificate sitting at home, it will take some time ( make that a lot of time ) to sell because the shares must be sent to the transfer agent, then booked into a account, the proceeds from the sale mailed to you, and so on. So liquidity is a major issue. DRIP's are not for day traders!
Overall, dividend reinvestment plans are a great idea for the newcomers to investing as they are really simple to start and very cost efficient for the investor too. However, keep all statements in a binder for record keeping purposes down the road.
 |
|
|
|
|
|
|
Epinions.com ID:
roynyr
|
 - Top 1000 |
|
Member: Roy
Location: About a foot away from the keyboard
Reviews written: 303
Trusted by: 151 members
About Me:
Update 2/22/09 - I have written my 300th review!!
GAME ON!
Huge NY Rangers fan!
|
|
|
© 1999-2009 Shopping.com, Inc.