How do you buy stocks for your portfolio? Do you wait until you have $500, $1,000, or more saved up to invest? As a small investor, I use to purchase shares for my portfolio this way in order to limit the amount of brokerage commissions and fees I would pay.
Then I learned of a different way to buy stocks in an automated fashion. Instead of saving up my funds, I figured out a way to invest small chunks of money each month without racking up huge commission costs. By setting up automated investment plans or AIPs, I am able to put my small investment dollars to work faster in the market.
If you don’t know what these types of plans can offer, here are 5 advantages to using this type of investment tool to build your portfolio.
1 – Buy Fractional Shares
As a small investor, it can be difficult initiating a position in a stock with limited funds. For example, let’s say you want to buy a stock that is currently trading at $75 per share, but you only have $100 to invest. You could purchase 1 share of the stock through your discount broker, but would have to wait until you got another $50 to buy your next share. Factor in commissions charged by your broker and you would probably need to save even more to buy that second share.
The nice thing about automatic investment plans is that most of them allow the investor to purchase fractional shares. So in our example above, the investor could buy 1.25 shares (instead of 1) with their $100 investment. Over the course of several months, these fractional shares can really start to add up.
2 – Passive Investing
Do you want to invest but don’t have the time to buy stock when you have the money available? Automatic purchase plans are perfect for the passive investor. These plans deduct money from your checking or savings account every month and automatically use the funds to purchase shares of stock. Once the plan is setup, there is no required interaction by the investor until they would like to stop purchasing the stock.
Investors must still do their own due diligence when screening stocks they plan to buy, but this type of plan can save the hassle of placing an order every month. It is also a good idea for investors to monitor their holdings periodically to make sure they are properly invested – regardless of how they buy their shares.
3 – Dollar Cost Averaging
One of my biggest fears of opening a new position in a stock is overpaying for it. I can’t tell you the number of times I have opened a new position in a stock only to watch it drop for the next several trading periods. Most of the time, I didn’t have the funds to dollar cost average and take advantage of a lower share price.
Automatic investment plans are a nice option to dollar cost average into a stock. These plans allow investors to pay a fair market price to own a stock by making several smaller investments over a longer period of time. As a long term dividend investor, I would much rather pay an average share price over several investments as opposed to trying to time the market and making a single purchase.
4 – Fewer Commissions and Fees
Some (but not all) automatic investment plans waive any brokerage commissions and/or fees. There are a few companies that offer Direct Stock Purchase Plans (DSPP) which waive any of these fees. For example, I have setup an automated investment plan to purchase $100 worth of Clorox (CLX) stock every month. This stock is purchased through the company’s DSPP and all fees are paid by Clorox. Limiting my investment expenses will allow me to put more of my savings to work instead of using a portion of it on commissions and fees.
Most online discount brokers (i.e. ING ShareBuilder) that offer automatic investment plans still do charge a commission on your purchases. However, depending on the amount you plan to invest each month, the fees may be less than if you were to place a regular buy order.
5 – Low Initial Investment
One of the best advantages of AIP’s is the low initial investment that is required. For as little as $25 per month, an investor can setup an AIP directly through a company sponsored plan and begin purchasing shares. This allows the investor to begin investing with no money, except for the monthly amount they choose.
I initiated positions in two dividend aristocrat stocks last year through their direct stock purchase plans. I setup automated investment plans for each, both of which invested $25 per month directly from my checking account. Money was a little tight for me at the time, but I knew I could afford $50 per month ($25 for each). Now, several months later I have increased my monthly position and continue to build my portfolio.
Long Term Investing through AIP’s
If you are a short term trader, then an automated investment plan is probably not for you. However, if you are a dividend growth investor like me, an AIP can be a great investment tool to start building your portfolio. These plans allow smaller investors with little chunks of money to get into the market sooner without having to pay huge commissions and fees.
These plans don’t require huge initial investment requirements like a mutual fund, allow investors to cut down on their expenses, and can help the small investor initiate a position in the market.
Do you purchase stock through an automated investment plan?