With DCA, the dollar amount remains the same each month, but the number of shares purchased varies because of fluctuations in the price. This strategy allows investors to ignore the short-term market and invest in companies over the long-term. It works because the market historically has shown strong returns over the long-term.
Lack of diversity is a drawback of DSPPs. Unless you invest in a number of different companies across a variety of industries, your investments will not have adequate diversity. The fees, although low, can add up over time. Many companies charge initial setup fees, purchase transaction fees, sales fees and more. Investors must keep track of the cost of stock purchases in order to calculate capital gains taxes due. Those with multiple DSPPs over many years have to keep track of a multitude of transactions for each year. You have no control over the trading date and price. Some stock purchases may take weeks.
DSPPs are generally available from large, well-established companies. You can agree to automatic monthly withdrawals from your checking or savings account to purchase more stocks. A transfer agent is a third party that represents the company. It may be a bank, a trust company or a similar organization. Corporations hire transfer agents to maintain records of stock transactions and investors’ account balances, to cancel and issue certificates and to deal with any problems, such as lost or stolen certificates. Some companies choose to act as their own transfer agent, but most use a third party. [4] X Research source
Do a quick search to get a complete alphabetical list of companies that offer DSPPs. Or do an advanced search to filter companies by industry or initial investment amount. See the minimum share purchase and the minimum purchase dollar amount. Click on the Plan summary link to view more information such as plan fees and features.
On the transfer company’s website, find information about the DSPP for the company in which you are interested. This will tell you about any associated fees, the minimum required to open the account and the minimum monthly investment. Supply information such as your name, address, social security number, bank account information and monthly withdrawal amount. Indicate whether you want the dividends to be sent to you monthly or reinvested into additional stock. You don’t have to set up a monthly withdrawal to purchase additional stocks. It is possible to make a single, one-time investment of a fixed number of shares. Reinvesting your dividends to purchase additional stock is known as a Dividend Reinvestment Plan.
Many companies that offer DSPPs also offer DRIPs. However, if you do not want to purchase stock through a DSPP, you can purchase one share of stock in a company with a company such as Frame a Stock. [7] X Research source
DRIPs also allow you to purchase fractional shares, which is purchasing less than one full share at a time. Over time, purchasing fractional shares is lucrative because instead of holding on to cash while it builds up, it is invested right away. [9] X Research source DRIPs also enjoy the benefits of dollar cost averaging. Over time, the investor pays an average cost for shares of the stock. [10] X Research source
With a partial enrollment plan, a portion of the dividends are paid to you. The rest is reinvested back into the company. With the full enrollment plan, the entire monthly dividend is used to purchase additional shares. If the monthly dividends are not sufficient to purchase shares in the company, they are allowed to accrue until additional shares can be purchased.
Full service brokers, such as Merrill Lynch, Salomon Smith Barney, Morgan Stanley and Dean Witter, offer personal advice, retirement planning, tax tips and a wide selection of investment products; however, they charge usually charge hefty fees for personal advice. Also, brokers earn commissions based on how much you trade, not the performance of your stock. This can encourage them to advise you to purchase when it’s not necessarily beneficial to you. Discount online brokers, such as TD Ameritrade and E-Trade, are a good option for self-directed investors who want to do their own research and not rely on the advice of a broker. The commissions are low and investors generally have control over their accounts.
Important questions to ask include whether they are offering any special promotions, how much the minimum balance is for brokerage accounts, what fees they charge and what types of education and research tools they offer. [14] X Research source Recognize that online brokers may not offer much in the way of research and education about where to invest because they are geared for investors who feel comfortable doing that research on their own. However, choose a site that offers a level of technical support with which you feel comfortable.
Important questions to ask include whether they are offering any special promotions, how much the minimum balance is for brokerage accounts, what fees they charge and what types of education and research tools they offer. [14] X Research source Recognize that online brokers may not offer much in the way of research and education about where to invest because they are geared for investors who feel comfortable doing that research on their own. However, choose a site that offers a level of technical support with which you feel comfortable.
If you have many years to let your investments grow, then you may be able to withstand a few bad years of losing money on investments. Also, if your other assets are highly valuable, then you may feel more comfortable with high-risk investments.
With cash accounts, you must pay the amount due on any transaction in full by the settlement date. You fully own all money and securities in a cash account. With a margin account, you can borrow money from the broker to fund more investments. You must sign a hypothecate agreement, which pledges securities as collateral for the loan, and pay interest on the money borrowed.
You can write a check and mail it in. Or, you can make a deposit from your checking or savings account through an electronic transfer. You may also be able to make a transfer from an external brokerage. Another option is to contact your bank to make a wire transfer. Finally, you can make a deposit of a physical stock certificate into your account.
Choose the order type. This means select “buy” or “sell. ” Select the desired amount of shares you wish to buy or sell. Plug your company’s stock symbol (if you don’t know it, you can search here). You will then be given information about your company’s current trading conditions, such as the current price of the stock and how it has performed that day. Choose the price type for executing your trade: market, market on close, or limit. Select “market” to execute the trade at the current market price. Select “market on close” to execute the trade as close to the end of the trading day as possible. Note that a market order or market on close are guaranteed execution, but price is variable. Select “limit” to enter a specific price for the trade. If the stock never reaches this price, your trade will not be executed. Note that limit order guarantees price equal to limit or better, but not execution Enter the term of your trade. This specifies the length of time your trading order remains in effect. Your choices usually include “good for the day,” “good for 60 days,” or “good until canceled. ” Click on the “help” or “?” icons if you have questions. Click the “preview order” button to review all of the options you just selected. This is your last opportunity to to make any changes. If it looks acceptable, click the “execute trade” button.
