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Stop Playing the Market

The risk is probably too much for you to handle!

Normally, when you invest in a stock, you buy a specific number of shares and go through a broker--either online or over the phone. For most investors, that process is more of a speculation than an investment. Buying and selling stock is based on “playing” the market. The investor is gambling that prices will rise, and is continually buying and selling based on that assumption. With markets plunging and soaring by hundreds of points on any given day, the risk inherent in such investing makes it inappropriate for most people. Investing through Direct Investment Plans (also known as dividend reinvestment plans or DRIPs) is different because these plans make it feasible to build holdings over an extended period of time in a diversified portfolio of stock. The beauty of DRIP investing is that you can spread your risk among a variety of companies and commit your money at a variety of price points. In addition, you get more value for your investment dollar, and you eliminate the broker (and the risk of a broker attempting to churn your account—and even brokerage failures). Dollar-cost averaging and wide diversification of assets—two risk-reducing strategies--are not feasible strategies for most people who invest through brokers. That’s because the brokerage commissions generated from small, regular investment in several different companies could account for almost as much as the stock itself. How many companies offer a direct investment plan? More than 1,300 companies—and many of them are among the most well known companies in America—Avon, Pepsi, Abbot Labs, Johnson & Johnson, to name just a few. Plans vary with each company, but generally they make investing very easy. Once you are enrolled in a company's DRIP, you can make additional investments by sending funds to the transfer agent with the tear-off portion of the statement that will be sent to you after each investment. In general, investments can be as little as $25 and as much as $10,000. They can be sent by check, by money order, and many companies will also automatically debit funds from the investor's bank account.

Emotions play a large part in investment decisions

DRIPs make it easier to withstand the temptation to act impulsively. We see volume increase at market tops and bottoms pushing prices too far in either direction. When everyone likes a stock, you want to own it too. When prices plummet, you want out and so does everyone else. That’s why many people buy at the top, and sell at the bottom. DRIP investing can help you win this battle with your emotions. Since you only need one share to qualify to join a DRIP, you can afford a widely diversified portfolio with companies in a variety of industries. And since DRIPs accept small investments, you can probably afford to send money regularly to buy more shares. That strategy (dollar-cost averaging) helps impose discipline on investing. You decide in advance how many dollars you intend to invest, and how often. Then you continue on this schedule, regardless of the market price of your shares at any one time.

How to find out more about dollar-cost averaging and DRIP Investing

You can get details about the operations of every company that offers the direct investing option at www.directinvesting.com. Click on the DRIP Info link at that site to learn more about the benefits of investing through DRIPs including the risk-reducing strategies of wide diversification and dollar-cost averaging. Use the search box at that site to find out more about a company that interests you.