Friday, November 2, 2012, AM | 3 Comments
For many individuals, the biggest obstacle that prevents them from getting started investing is lack of money. Got only $20 to put away, you say? Well, there are ways you can start investing with as little as $20, the money you saved by not going to Starbucks for a couple of days.
You can ask yourself a question. Did I fire…? Seriously, is it even worth it to invest such a small amount? Of course, it is. It always is.
Two of the best ways to invest small amounts of money cheaply allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.
Dividend Reinvestment Plans (DRIP)
A DRIP is a dividend reinvestment plan that a company sponsors for existing shareholders.
You must be a shareholder in order to participate in a company’s DRIP, and any dividends paid by the company will automatically be reinvested in additional shares of stock in your account.
A DRIP is ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging).
DRIP may be one of the surest, steadiest ways to build wealth over your lifetime. Make sure you keep good records for tax purposes.
Once you are in the plan, you can set up an automatic payment plan, and you don’t even have to buy a full share each time you make a contribution. Pretty soon you will be dripping with money.
Direct Stock Purchase Plans (DSP)
A DSP is a direct stock purchase plan. Companies that have DSPs allow anyone to buy shares from the company directly.
Following that initial purchase, the plan operates just like a DRIP.
The difference really comes down to how the initial shares are acquired, either directly from the company or from another source.
In order to qualify for a DRIP plan, you are required to already own stock in the company you are interested in. You must have the physical stock certificate in their possession.
The best thing to do is to contact the company you are interested investing in and request its prospectus along with the appropriate DRIP account forms.
These documents will detail the specifics on the plan.
If you want to participate in a DRIP plan, but do not already own stock in the company, the obvious step to take is to gain ownership in the company.
The easiest way to buy stock is to open an account with a broker and simply purchase stock.
Once the purchase of the stock is completed, you can, then, request your broker to send you the stock certificate, whereupon you are ready to enroll in the DRIP plan.
There is a lot to learn about these investing vehicles.
Naturally your stock broker doesn’t want you to know that there is a way for you to cut out the middleman and deal directly with the stock and its transfer agent.
In any case, more than 1,000 major corporations offer these types of stock plans, many of them free.
Even with fees that are low enough to make it worthwhile to invest as little as $20 or $30 at a time.
In a Nutshell
If you are short of money, either of these options may be a good tool for investing.