Investment Alternatives

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 DRIPs.

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 simple).

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 traditional investing.

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.