Investing on a Shoestring

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By Selena Maranjian (TMF Selena)
April 22, 2003

Q. If I can only save a few dollars a week, can I still invest? Is investing worth it for those of us with limited means?

A. Many people think they'll never join the investing set. They assume they don't have enough money to start. But investing isn't just for the rich.

If you have just $20 or $30 per month to invest in stocks, you can do so, thanks to dividend reinvestment plans ("Drips"). By investing via Drips over many years, you can build meaningful wealth for yourself and your loved ones.

Drips permit you to buy shares of a company's stock directly from the company, bypassing brokers (and brokerage commissions!). They've been growing in popularity in recent years, and hundreds of major corporations now offer them.

With traditional Drips, the company expects you to already own at least one share of its stock before you enroll in the program. The share must also be in your name, so if you're not already a shareholder, you'll have to buy at least one share through a broker, paying the commission.

In addition, you'll have to specify that you want the share(s) registered in your name -- not the brokerage's name, as is typically done. Then you can open a Drip account with the company, and buy additional shares directly through the company (or its agent).

A new variety of Drips called direct stock purchase plans (DSPs) operate in much the same way, except they don't require you to own at least one share before enrolling. You can buy your very first shares through the company.

With Drips, you can "dollar-cost average" -- accumulating shares in a company by regularly plunking a certain amount of money into it. (Dollar-cost averaging involves spending the same amount at regular intervals on a certain investment.) Drips will even purchase partial shares for you.

For example, if PepsiCo (NYSE: PEP) is trading around $40 per share and you send in a $50 contribution, it'll buy 1.25 shares of stock. If next month PepsiCo is at $30 per share and you send in $50, you'll get roughly 1.7 shares. When the price is low, your money buys more shares, and vice-versa.

Take some time to learn more about Drips, the power of dividend growth, and the power of direct investing. Also, check out our guide to Drips: Investing Without a Silver Spoon: How Anyone Can Build Wealth Through Direct Investing.

If you have any questions, thoughts or opinions on this column, share them with others on our Ask the Fool discussion board.

This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.