ING DIRECT offers an automated investment service called ShareBuilder. It mimics the way Direct Purchase and Dividend Reinvestment Plans (DRIPs) work, by allowing you to invest fixed amounts of money, with a price of $4 per share. With ShareBuilder, you don’t actually purchase individual shares of stock like you would with a traditional investment plan. Instead, because you buy shares based on the amount of money you want to invest, you often wind up with fractions of shares.
DRIPs work in a similar fashion: you invest a set amount of money in a particular stock. You buy as much stock as you can get with your funds, down to fractions of a share. With some high-priced stocks, you may not even buy full shares — just a fraction here or there. DRIPs do have some drawbacks, however: most have setup fees or requirements that can make it difficult to get involved in the program and expensive to continue in it. But the real benefit is that the cost of shares average out, if you purchase through a DRIP on a regular basis. Perhaps you invest $50 each month in a DRIP. The first month, your stock’s price might be $100, so you’ll get 1/2 of a share. The second month, the price drops to $50, so you purchase a full share. And, in the third month, it shoots up to $150. That means your price per share would average out to $100. While it isn’t the great price you might have gotten if you had invested all of your $150 during the second month, it also isn’t the much higher price you saw during the third month. Instead, you’re paying an average amount — and significantly reducing your risk by spreading out purchases over time.
ShareBuilder’s $4 per trade rate can be significantly cheaper than a traditional DRIP, but that depends on how you go about your investments. If you want to do true dollar-cost averaging — investing the same amount of money on a regular basis, no matter the cost of a share, in order to get a lower average cost for shares — ShareBuilder may not be ideal. The ideal approach to dollar-cost averaging would be to buy some shares every week, but that means that, over a full year, you’ll pay $208 for the privilege. If you’re only investing $25 per week, that fee is 16% of your investment.
Instead, there are other approaches that work better with ShareBuilder — although they may not have quite the ideal return. Rather than investing your money every week, you can set up your account to only invest when it hits a certain threshold, like $300. You’ll save on those fees, which can be quite ideal. You don’t get the dollar-cost averaging, but you still get a better deal on an automatic investment plan than you’ll find most places.
It’s also worth noting that shares you purchase through ShareBuilder are not actually in your name — you aren’t a registered shareholder. Instead, shares remain in ShareBuilder’s name, in order to keep trading costs down. It’s a tradeoff for having access to low-cost trading. If having stocks in your name is an issue for you, you can get a certificate from ShareBuilder for $75.
If you don’t want an automatic plan, though, ShareBuilder is definitely not the right choice for you. If you plan on actively trading stock, rather than setting up reoccurring purchases, ShareBuilder will hit you with a $9.95 fee for each trade — more than double the fees for its automated trades. There are plenty of other online trading options that offer you far lower prices for active trading.
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- What Are Dividend Reinvestment Plans(DRPs)?” (Motley Fool)