Building a Portfolio- a few shares at a time
Sep 30 '00
I started participating in Dividend Reinvestment Plans when I was very young, and began actively participating when I was in High School. Concerning this type of investment plan in general: they are a great idea. From an individuals perspective, they taught me 1. How the stock market, and financial markets in general, works. This sparked an interest that stayed with me through college, and brought me to my first job on Wall Street, and to the career that I am in today. 2. It gave me the discipline, by seeing the rewards, to save on a regular basis. 3. Direct Stock Purchase Plans gave me a deeper interest in companies and industries in general, and led me to do a greater amount of research, and therefore gave me a greater level of understanding, about companies, industries, everything
What they are
So what is a DSP/DRP? A Direct Stock Purchase Plan is plan that is set up by a particular company, or on behalf of a company, that allows individuals to invest a set dollar amount per month/interval that the investor chooses. The funds are invested directly into the shares of a companies common stock, always avoiding brokerage fees and often for free. Many, however, do charge a nominal fee per investment. For example: I can set up a DSP to invest $50 per month in shares of Coca Cola (NYSE: KO), Intel (Nasdaq: INTC), and Pfizer (NYSE: PFE). My money is invested directly into the shares of these companies, and because I am able to invest a certain amount each month, I build a position in each company over time.
Who is This Good for?
While I think that anyone and everyone can benefit from these plans, more mature people probably have an established investment plan. I would strongly recommend this type of investing for young people who: 1. Do not have a lot of money to invest, and 2. Who could benefit by learning how investing works, and can see first hand the benefits of an established, disciplined plan.
But, Why do I want to Buy 1.5 shares of Pfizer?
Of course, when you first start, it may take a little while to see the results, but if you stick to a regualr plan, you will see the rewards over time. Just $50 a month is $600 per year, and believe me, it adds up. Take into account that you are buying shares regardless of the price of the stock, so you additionally get the benefit of Dollar Cost Averaging. What? Dollar Cost Averaging is buying a set dollar amount of shares consistently- month after month. Stocks go up and stocks go down. The DSP investor doesn't really care. When the share price of a stock drops, your $50 buys you a great number of shares. For example: Say, for the sake of round numbers, Pfizer is trading right at $50 per share. Each month, you would buy 1 share. With me? O.K., say Pfizer's share price drops over the next few weeks to $40, now you're buying 1.25 shares per month. Your average cost, therefore, is dropping. Say the next month Pfizer is down to $35, and you pick up 1.43 shares. A month later, Pfizer is back to $45, and you pick up 1.11 shares with you $50. The end result after 4 months- you've invested $200 and purchased 4.8 shares at an Average Price of $41.75. This, over time, becomes even more powerful. Take a look at a historical chart of Pfizer back 5 years ago, do a little math, and see what the result is.
Risks Involved
It is important to note that there are a number of risks associated with this type of investing. Specifically, you will be investing in a smaller number of companies than you would be with a mutual fund. Of course, if you choose the right ones, you will do much better. I do not recommend this as your only investment- diversify. Keep some money in mutual funds, or just in stocks if you have enough diversification. "Don't put all your eggs in one basket".
Where Can I Learn More?
There are many place to do more research and learn how to enroll. A good place to start is at www.dripinvestor.com. It will give the ins and outs, and cover some topics that I have not detailed. It will also give you a list of all the companies that offer this program: GE, Home Depot, Disney- there are tons with more added each week. Also, there are a few internet sites that offer this now, as well. They allow you to invest a set amount, regardless of whether the company sponsors the plan or not. Check of www.sharebuilder.com for more info from them.
All in all, a great way to take a hands on approach to investing, learn more, and choose the companies to invest in, rather than just putting your money in a mutual fund.
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