This was a guest post written by Corinna Underwood who is a member of Debt Management Talk, a personal finance forum that shares its revenue with its members.
So you have decided that you want to venture into the stock market but you don’t have a lot of savings and you don’t want to take any big risks. How can you test the water without cleaving into your budget and still make additional income? Actually it can be done. Even if you only have as little as $20-$30 you can still start buying shares directly from a range of companies including Harley Davidson, Time Warner and Wal-Mart.
One of the best ways to make safe, small investments is through Dividend Reinvestment Plans, commonly known as DRIPS. These plans are currently being offered by more than a thousand companies and most of them have either very low or no fees and you can bypass brokers by buying directly from the companies. DRIPS are ideal if you are just starting out or if you want to make small, regular investments. To become eligible for a Dividend Reinvestment Plan, you usually need only one share of stock.
One major bonus of this type of program is that as you are investing small amounts every month then you are dollar-cost averaging. This means you are reducing your market risk by buying more stock when the price is low and less when the price gets higher. Once you’re enrolled into a DRIP account instead of receiving your dividends they will be directly reinvested into the program, so your investment continues to grow.
You do pay income tax on your dividend, just as you would if you had received them but you can add the amount of your dividends to the basis of your stock to reduce your gain when you are ready to sell.
Another advantage of DRIPS is that you buy fractional shares. Your automatic payments are set up to reinvest fixed amounts during each purchasing period. This means that even with the smallest portfolio you can recoup significant gains.
For some, there is a downside to DRIPS, in the fact that you are only permitted to purchase additional shares during the company’s Optional Cash Purchase periods which are generally scheduled monthly or sometimes quarterly. Also, checkout each individual company’s prospectus, some of them charge commissions on shareholder purchases and reinvestments to cover the expenses of running a plan. You can get hold of a company’s prospectus and enrollment form by contacting their transfer agent or investor’s relations department.
Advantages of DRIPS
- You can start with a small amount of money. Just one share is usually enough to get you started.
- Enrolling into the program is simple; the paperwork is minimal.
- Many companies will allow you to purchase DRIP shares for very low fees or often no fees at all.
- Once you are enrolled in a DRIP the process in completely automated and requires little monitoring.
- There are a number of companies which allow investors to buy shares through DRIPS at discount prices. These discounts range from between 1-10 percent.
- Because DRIPS allow you to invest small amounts of money over a period of time, you tend not to miss the money so much and you can still develop a long-term investment plan.
You can find a complete list of DRIP companies at InvestorGuide