Most “investors” are really “speculators” … and don’t realize it. If your basic approach is seeking to make abnormally high returns, you’re speculating.
Of course, you may do some research and try to make an educated decision on the direction of the trade.
But often, whether you realize it or not, you’re taking on significant risk from bets that could swing widely either way.
Investors, on the other hand, seek to generate a satisfactory return on their capital by taking on an average or below-average amount of risk. Investors do research and fundamental financial analysis.
For example, an investor might invest in a portfolio of large stable multinational companies that have low business risk and pay a consistent dividend that increases annually.
Further, an investor would choose to invest in these companies over the long-term to make a satisfactory return, reinvesting the dividends to maximize return on his or her capital while taking on relatively low risk.
DRIPs, or Direct Investment Plans, are the perfect investment vehicle for investors. Here’s how they work, and why by investing through them you’ll accumulate far greater wealth. Really!
What is a Direct Investment Plan (DRIP)?
Normally, when you invest in a stock, you buy a specific number of shares through a broker. Indeed, participating in “the market” anticipates buying and selling.
But when you come down to it… buying and selling is really speculating–not investing. You’re gambling that prices will rise before you sell.
DRIP investing is different. DRIPs are plans that provide an efficient way to build up holdings over time. You eliminate the broker and your investment amounts buy shares directly from the company. By investing over time, you don’t have to guess about when to buy.
What’s more, such regular (or irregular) investments buy more shares when prices are lower and fewer shares when they are higher. The end result is that YOUR cost per share is even lower than the average price per share during the period you invested.
How does it work?
You pay a modest one-time fee to get enrolled, and for many great companies you will not pay another dime as you accumulate shares. No fees… no commissions… nothing. In other words, every dollar you invest goes to buy shares.
This will vastly improve your investment results. You may think that a small brokerage commission is not particularly meaningful. But the culprit is not the fee.
The real killer is the opportunity cost of not investing the money you’re spending on fees. That is… the dividends that would have been paid to your account on the shares those fees would have bought—and the effect of compounding on those dividends! Even small fees have an overwhelming effect on portfolio performance.
Why save in the bank when DRIPs make it possible to save in stock?
There are about 1,300 companies with DRIPs. Plans vary by company, but there’s information about every DRIP at our Website directinvesting.com.
You qualify to open a DRIP by becoming an owner of a single share of the company stock. After that, you send money to your account to buy shares. Most plans accept investments of as little as $25 (of course you can invest $1,000s if you have the wherewithal).
With such easy entry, there’s no reason why you can’t establish accounts in a broadly diversified group of no-fee DRIPs and fund them regularly, building assets over time.
This makes equity investing a reasonable option for almost everyone. The problem is that most people don’t know about DRIPs or think they sound too good to be true.
It’s easy to make investments into your account
You will receive a statement from the company with a tear-off portion at the bottom to return with your next investment.
You can even have them automatically take money from your bank account. Your funds will buy shares based on the market price of the shares on the investment date. (Say you want to invest $100 regularly in Company X. When it’s selling for $67, you’d get 1.33 shares. When it’s selling for $100 you’d get only one share.)
Thus DRIPs make it easy for you to take advantage of market dips… instead of allowing the market to prey on your natural fears, while allowing more logical investors to buy the stocks that you may be rushing to sell.
While it’s human nature to try to “beat” the market, it rarely works. DRIP investing can help you win this battle of emotions and much more.
Until Next Time,
Ms. Vita Nelson is one of the earliest proponents of Dividend Reinvestment Plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing. She is the Editor and Publisher of Moneypaper’s Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).