DRIPs offer the best way for small investors to invest in
the stock market. A few alternative ways to invest are listed below:
Alternative #1 -
Buy Low, Sell High: A more
technical term for this style of investing is speculative trading.
A lot of people try to invest this way. Usually, the only thing they
end up with is a lot of stress; and the only one that makes reliable
profit is the broker. There are many problems with a small investor
trying to do speculative trading. The biggest problem is the
market. The market price of a stock, at any time, is a consensus of
all of the investors. The price of a stock is the ultimate
agreed-upon price, given the value of the stock, its earnings potential,
and overall market conditions. No matter how hard anyone tries,
there is no way to outwit this system.
We have all heard from that speculative trader (perhaps a
coworker or relative) that mentions how he/she just made $1000 on a trade
last week. But that same person usually isn't so ambitious to talk
about the $1200 he/she lost the month before.
Unfortunately, for the speculative trader, there are even
more disadvantages than the reality of the market. There are the
brokerage fees--which will significantly cut into the profits of any small
investment (especially as you trade more). But by far, the biggest
disadvantage for the speculative trader is competition. The
speculative trader must try to out-anticipate large brokerages (who have
instant access to information), and they must try to out-anticipate
investors with insider information.
Alternative #2 -
Buy and Hold: Historically,
this has been a good investment strategy for individual investors.
Save up a large bit of money, pick a good company, go to a broker, buy
stock in a the company, and hold it as it goes up in value over the long
run. This isn't a bad way to go. But for the individual
investor, this strategy could be vastly improved upon by investing in
The DRIP Investor can get started investing in most of the
strongest stocks with very small amounts of money. Then, whenever
more money becomes available, the investor can send a check to add to the
investment--without paying for a broker each time. In addition, most
stocks pay dividends every quarter. For the investor who buys and
holds a stock, they will receive quarterly dividend checks. These
checks represent a good and consistent portion of annual yield (1 to
5%). But when sent as checks, they are more of a nuisance than a
benefit. Join a DRIP, and let those dividend checks help to build
upon your investment. And at the same time, you'll be taking
advantage of the long-term benefits of Dollar Cost Averaging.
Alternative #3 -
Mutual Funds: For many small
investors, mutual funds can be the best investment option. When you
buy stocks through DRIPs, you remain involved with your investments.
You'll get earnings reports from the companies. You'll decide which
companies to invest more money in and when. You'll have to keep
track of your investments (though DRIP Wizard makes this task
For the investor that wants as little involvement as
possible, mutual funds are a great investment option. Mutual funds
are pools of money from many investors, all managed by one broker.
By putting his/her money into the pool, the small investor can have a
diversified portfolio. Some of the pool's money will go to research,
advertising, and broker profits. But for the most part, the fees and
commissions are significantly lower than traditional buying and
selling. Still, a drawback of this option is that a mutual fund
investor will usually give up about 1.0 to 1.5% of their principal
annually to fees. This applies to normal and no-load mutual funds.
For the small investor, mutual funds have many
benefits: small amounts can usually be invested, diversification is
achievable, there is little investor involvement, and there are less brokerage fees than
But for most small investors, DRIPs are a far
superior option. Consider the following benefits: extremely
small amounts can be invested, diversification is achievable, there is more
investor involvement, there are virtually no brokerage fees, and the investor can
continue to add to investments in small amounts.