Pros And Cons Of Drip Investing

Posted by GuestPoster on February 22, 2010 under Money, Stocks | Be the First to Comment

When you want to fill a bucket of water, you put it under the faucet to watch the water rush out and crash into the container. However, if you do not have much water, you still put it under the faucet because a full bucket is a full bucket regardless of the speed it takes to reach that goal. That is how drip stock investing works. It’s the method of investing where you send small amounts of money into a pool that allows you to buy small fractions of shares you could not afford in full. With time your ownership stake increases.

Drip investing requires additional fees from regular investments. Transparency is also an issue. You are never issued share certificates for your .5 share of GE stock. You can only own these stocks in full or not. Instead your money goes to a holding company that acts as a proxy. The other share will pile up your money and share your the profits from the gains of the original share. Eventually when you have enough money you purchase the actual share.

Now, the criticism of drip investing are the fees. The brokerage firm will charge you money to setup this account or an annual fee or a percentage of the profits that you might gain. It is like financing your own profits. And when you lose money – well – no one shares in your loss. There are advantages and disadvantages to the process and no one tries to hide that from you. However, some people think drip investing is right for them but in fact they may be better off simply saving their money until they can buy a full share. Or better yet, put that money towards a mutual fund. If you’re a beginning investor, it might be easier to stick to the basics, but for more experienced traders, drip investments can be a tool worth consideration.