If you are new to the investment world, you’ve likely never heard of drip investing. A Drip, which is more properly spelled as DriP, is the acronym for Dividend Reinvestment Plan. This program offers a chance for you to buy stock from your company’s agent of transfer, rather than going through a broker. This type of plan allows you to reinvest dividends, normally without being charged for it.
This strategy’s strength lies in the concept of dollar-cost averaging, which means that you can make more than one purchase over a long time period. This will reduce your risk, which is one of the most important aspects of investing.
Before you dive into DriP investing, make sure that this is a means of investing that will work for you. Each DriP plan has a minimum purchase amount. You don’t have to buy every month, but when you do buy, you can’t buy lower than the minimum amount. For some companies, this amount can be as low as $10, but others have a minimum purchase of $100 or more.
You can save enough money to make a minimum purchase, but this increases your risk. If you can’t make regularly timed purchases, because of the minimum, this can compromise your strategy. Another consideration to keep in mind is the discipline that is required to be a regular investor.
If you don’t have the control to be a regular investor, you can set up an Automated Clearing House through the transfer agent. You can transfer money periodically from your account, although you may incur a charge for doing so. You should also consider the timing that the investment funding uses. DriP investments work better when they are established over a period of ten years or more. If you will be needing your money sooner than that, you may want to find a vehicle other than DriPs for your investment dollars.