"DRIP" stands for dividend reinvestment plan. DRIPs are offered by companies who allow you to buy stock directly from them without going through a broker. You simply sign up for the company's DRIP and begin purchasing the number of shares you want each month. This can be an easy way to get started investing and it can get you into the habit of setting aside money regularly.
No Broker Fees
You do not need a broker to buy shares of stocks from a company that offers a DRIP. You buy the shares directly from the company. This puts more of your money to work immediately. Some companies do charge a small commission for this service, but their fees are much lower than brokerage fees. Many companies charge no fee at all, so all of your money goes to work from the start. This can be particularly attractive if you are only buying one or two shares at a time. You won't have to pay a trading fee for such a small transaction.
Low Minimum Investment
You can get started in a DRIP for as little as $10, according to the website, DripInvestor.com. This makes DRIPs attractive to people who don't have a lot of money to invest but who still understand the value of setting a little bit aside every month. Companies typically make DRIPs available at the same time every month. So if you mark your calendar, you can get into the investment habit easily even if you don't have a lot of money to start with.
Starter Investment for Kids
According to the website ConsumerReports.org, many grandparents use DRIPs to get their grandchildren started in investing. Kids can understand the simple concept of investing their money in a company without having to understand the complex workings of full-service brokers and discount brokers. This teaches them to save for the future and can spark their interest in investing.
Many quality companies offer DRIPs. According to the website DRIP Central, nearly 400 companies offer these plans. This gives you a wide variety of businesses to choose from. You may want to start with a company you know and buy shares regularly to see how they perform. If you're satisfied with that company's growth, you can continue with your DRIP. On the other hand, you may spot another company you like as well and start a DRIP there. In this way, you could build your own portfolio of DRIPs and be invested in top American companies.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.