Making that First Investment
People start and join investment clubs for lots of reasons, from the social outlet and the discipline the format provides (your fellow club members are counting on you to attend meetings, pay your monthly dues and contribute to investment research) to the opportunity to acquire a solid stock market education. But, of course, all of those reasons are a means to an end – the end being profit. Somewhere down the road, say 10 or 20 years from now, your club’s members hope to have accumulated enough moolah to help their kids through college or supplement their retirement. They’re looking for the club to make money. And the way for the club to start making money is by beginning to build a portfolio.
Some new clubs wait up to a full year before buying their first share of stock. That’s probably not the best strategy. Once the initial excitement of forming a club has waned, it can be challenging for club members to maintain enthusiasm when each month, they’re going through the motions, but haven’t yet achieved what they started out to do – become investors. Buying that first share of stock for the club's portfolio can generate an atmosphere of enthusiasm and pride as the members realize partial ownership in a company and begin following that company as an investment.
A Brief History of Stock Purchasing
It wasn’t so long ago that there was only one option when it came to buying a share of stock – using a broker. That began to change in the 1970s, when more and more companies started to offer Dividend Reinvestment Plans (DRIPS). As companies realized the benefits of the long-term investor, such as the stability they offer, they began to offer these plans in an effort to attract them.
There are basically three ways to purchase that first share of stock:
- Directly through the company, via a DRIP.
- Through a Discount Broker
- Through a Full-Service Broker
DRIP Plans
A DRIP plan not only allows you to bypass the broker and buy shares of stock directly from the company (usually through the company’s transfer agent), but offers you the option of reinvesting the dividends you earn as well. Those dividends go toward the purchase of additional shares of stock – even fractional shares if your stake in the company is small and you’re not yet generating a large sum in dividends. Each company operates under its own set of rules and requirements and you’ll need to read the fine print before you make the decision to enroll in the plan. But in most cases, these plans are a very cost-effective way to not only buy that first share of stock, but to add to your holdings as well.
Some of the advantages to using a DRIP include:
- You don’t need a large amount to get started.
- Any dividends the club earns go to work for the club immediately.
- Most companies allow investors to purchase additional shares at no cost, or for a nominal fee.
- Many companies offer an automatic investment option.
- Some companies allow investors enrolled in their DRIP to purchase shares of the company’s stock at a discount to the current market price.
- These plans are conducive to investors who wish to invest small sums of money on a regular basis over the long haul – a perfect match for an investment club.
For more information on DRIPs, check out Doug Gerlach’s "Investing on a Shoestring" workshop, which appeared recently in the classroom forum on StockCentral:
http://www.stockcentral.com/community/tabid/143/view/topics/forumid/289/language/en-US/Default.aspx. In addition, you can find the answers to most of your questions on DRIP investing at www.DRIPcentral.com, which features a complete online DRIP investing book, a free newsletter, the Ask Doug, the DRIP Expert column, and a DRIP website directory.
One of the biggest disadvantages is that not every company offers a DRIP. If the company your club wishes to purchase doesn’t offer such a plan, you will need to go through a broker.
Discount Brokers
There’s no question that the Internet has not only revolutionized investing, but it’s driven the commission fee for stock and mutual fund transactions down into the single digits. In addition, most online discount brokers also offer features such as:
- No account or investment minimums
- Automatic reinvestments
- Investment research links
- Articles on investment basics
There are lots of discount brokerage firms, such as Ameritrade, E*Trade, and Charles Schwab as well as Internet sites that offer low-cost transaction fees. Keep in mind, though, that discount brokers are able to offer these low fees because they offer little, if anything, in the way of advice. My favorite Internet sites are:
Full-Service Brokers
Full-service brokers, like Merrill Lynch and Morgan Stanley, have teams of research analysts who study companies and industries and offer advice. These services come at a price (remember, there’s no such thing as a free lunch), and in the case of a full-service broker, you will be paying more for your investment transactions – possibly quite a bit more. So, you ask, with the availability of low-cost stock purchase options like DRIPS and discount brokers, what keeps full service brokers in business?
I think it’s safe to say that most of the people who use full-service brokers are not do-it-yourself investors. They’re not interested in learning the ins and outs of the stock market; they’d prefer someone else handle their money so that they don’t have to think about it. That said, some clubs – particularly new clubs with little or no previous experience in the stock market – may benefit from the guidance a full-service broker offers. He or she can not only can aid the club in its research, but will often drop in on club meetings on a regular basis to answer questions, review the club’s portfolio and/or make a presentation on an educational topic.
Investors used to pay full-service fees in part because of the detailed research and information that full-service brokerage houses could provide – information that was difficult for the average person to readily access. The Information Superhighway has changed all of that – offering everything from up-to-the-minute news and stock quotes to online communities, like StockCentral.com, where you can ask questions and exchange ideas with like-minded investors. Knowing that the Internet has opened an amazing door of opportunity for you and your fellow club members -- not to mention that educating yourselves and learning to make your own decisions is the point of belonging to an investment club -- may make your choice a little bit easier.
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