You Don't Have to be Rich
to Get Richer
Rich people can "average down" (buy more when the price drops). The less wealthy tend to become frightened when stock prices fall and sell.
Leveling the Playing Field by Investing in DRIPS
With direct investment plans (DRIPs), you don't need much money to start investing. You don't have to have $2,000 or $2,500 on hand to open a brokerage account. Instead, you can begin with next to nothing and end up with a bundle. That's because DRIPs make it possible to invest as little as $25 or $50 directly into your own account with the company--without going through a broker‚ and without fees or commissions. Your investment buys shares (or fractions of shares) based on the market price of the stock on the company investment date.
Why don't you know about direct investment plans (dividend reinvestment plans or direct stock purchase plans)? No one advertises them. Brokers have no reason to do so and SEC rules forbid companies from advertising them.
DRIP Investing Reduces Risk
It's true that investing can be risky. But the reason that most people get burned is because they try to guess which way the market will go. With DRIPs you don't speculate on the direction of the market. Years from now, this conservative investing strategy will have helped you build up sizable holdings with such small investment amounts that you might not even have missed the money.
The bottom line: Large investors have the resources to back up their investments. When prices dip, they can buy more. Small investors tend to get nervous when the market price of the stock they are holding drops. They sell when they might be better off buying. DRIPs give you access to the same risk-reducing strategies that big investors can afford, you can own lots of different companies and you can dollar-cost average, buying more shares on market dips. What's more, as a DRIP investor, you're less likely to react emotionally to the financial news and you won't have to worry about your broker. You will just keep adding to the shares you own (in your own name) in your DRIP account. Years later you will find that you have built substantial wealth.
Advantages of investing directly
- Safety. The collapses of Bear Stearns and Lehman Brothers are stark reminders that broker risk does exist. With a DRIP, the stock is registered in your name--not in the name of a broker who holds your account. What's more, you can probably afford to own lots of different companies since you can open your DRIP accounts with as little as a single share. Lots of high quality companies offer DRIPs, such as Abbott Labs, Avon, Black & Decker, Hasbro, Intel, Johnson & Johnson, Stanley Works, and many more blue chip corporations. This diversification also reduces your risk.
- Time your Investments not the market. You can invest as little as $25 in each company whenever you have the money to do so (of course, you can also invest a great deal more than that). Or you can set up a program to invest automatically on a regular basis. This systematic approach is known as dollar cost averaging . Doing so through a DRIP means you don't have to guess which way the market is going next week, next month, or next year. You are in for the long haul! Market slumps can actually be an advantage. When the market is down, your investment will buy more shares than it would when the market is high.
- Diversification. Because you can open a DRIP account with a single share of stock you can become an owner of lots of different companies. There are companies that offer DRIPs in virtually every industry. You can use our search function to find companies based on industry to create your diversified portfolio.
- Efficiency. Unlike traditional investing, which is based on buying certain numbers of shares, DRIP investing is based on investing dollar amounts. A no-free DRIP makes it feasible to invest even small amounts on a regular basis. Dollar-cost averaging also imposes discipline on your investing because you decide how many dollars you intend to invest on a schedule that you set up in advance. By investing a fixed number of dollars on a regular basis regardless of the share price, you end up buying more shares when prices are low and fewer shares when they are high, the classic goal of savvy investors.