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I receive many questions every week from those just beginning to invest in the stock market. Many are apprehensive and with so much information available, particularly online, choosing one's investment path can be overwhelming. Should you invest in a DRIP or select an online broker? A mutual fund or a bond?
Well, let's start off with dispelling the notion that you only have to pick one type of investing. You do not have to ditch your DRIP's to invest online, nor do you have to lose your stock to hold a mutual fund. In the media, particularly in the commercials, it can appear that the only way to make your money work is to go with one "way", or more accurately, one "company". As Charles Carlson recently stated in his weekly DRIP commentary, "Never before have investors had so many convenient and inexpensive ways - mutual funds, online brokers, and direct-purchase plans - to access the financial markets." So let's look at some of the issues facing investors in these areas, and why some methods might be better than others.
First, as far as convenience is concerned, there is no doubt that online investing is the first thing that comes into one's mind. However, did you know that through a company called Netstockdirect.com, you can invest in a DRIP or DSP (Direct Stock Purchase) plan right online. That's right, you don't have to call, wait for a prospectus and forms and then wait for your certificates to show up a month later...just don't use your Visa to pay for them! Okay, so now that you know you can get into a DRIP online, how do you decide when to buy a DRIP and when to use an online broker?
If you are like me, and like to invest the majority of your money for the long term, then a DRIP might be the place you purchase "blue-chip" stocks that you want to hold on to, continue to invest money in and maybe pass down to your grandchildren, or cash out when you retire. On the other hand, if you would like to take advantage of the ups and downs of the market (and have the money and feel confident enough to do so), an online account can be a good idea. Just remember that an online investment account can be a lot like gambling, and if you don't have a lot of money in it, more trading can actually reduce your portfolio by all the commissions you have incurred by doing the actual trading.
A DRIP is also a good choice if you don't have a lot of cash to invest right away. A typical online trading account requires a minimum of $1000.00 to open it, whereas one can get into a DRIP for $250.00 or less, and they will automatically deduct your checking account, if you like, to keep you investing every month at $25.00 or so a month. Another great advantage to a DRIP is that you can purchase fractional shares. Say you don't have the $70.00 to purchase a full share that month, okay, with your $50.00, you can get a portion of a share...and to paraphrase Fast Eddie Feldson, "a part of something is better than 100% of nothing".
As far as fees are concerned, all paths have them. Sorry. DRIPs' fees tend to be lower, but then you are often required to invest less, so you do the math.
Mutual Funds, how do they fit in all of this. Well, they can round out your portfolio and provide diversification, particularly if you are interested in foreign markets, small caps or tech stocks and are not as strond as you'd like to be in those areas or feel that your investments would do better growing in a group than on their own.
What's the bottom line? The bottom line is: Don't limit your investments because a broker, or the media, seem to be pushing in one direction or another. Investigate all opportunities and choose the combination that suits you best.
Resources in this article include:
DRIP investor, dripinvestor.com
Net Stock Direct, netstockdirect.com
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