Advantages and Disadvantages of Plans
Advantages of Direct Purchase Plans and DRIPS
In general, the major advantages of direct purchase plans and DRIPs are as follows:
- Both Encourage Teenvestors to Get Into the Market. When a Teenvestor finds a good, stable company with strong growth potential, she can start a small portfolio and build it over time. Take Exxon Mobil Corp. for instance. The company requires that you make an initial investment of $250 in its DRIP. Another company, Kellogg’s, requires an initial investment of $50. On the higher end of the initial investment scale, McDonald’s has a minimum initial investment of $500, but for a custodial account (which would be the account for most Teenvestors), it is only $100.
- Both Allow Optional Cash Investments. That is, they allow you to buy additional shares periodically. While the initial investment amount for ExxonMobil is $250, the additional optional monthly investment is $50 for no additional fee. For Kellogg’s, which has an initial investment requirement of $50, the additional optional monthly investment is $25 or more for no additional fee. McDonald’s has a minimum initial investment of $500 ($100 for custodial accounts) but an optional additional investment of $50 or more. Since the initial and optional share purchases are in dollar amounts, a Teenvestor is actually buying fractions of shares for his contributions. For example, if the stock price of a company is currently $100 per share and a Teenvestor contributes $25 to buy additional shares in the company’s DRIP, the Teenvestor would own an additional one-quarter of a share ($25/$100 = ¼).
- Both Charge Very Little in Brokerage Fees. The companies save investors brokerage fees by pooling the money of the various investors before approaching brokers to buy the shares or sell them on your behalf. This way, the fees are effectively reduced for each investor. When you want to sell shares, the fees are also very low due to the pooling of all sellers.
- Both Plans Permit Dividend Reinvestment. This is great for Teenvestors because the dividends they will be getting on just a few shares of stock would not amount to much. It is, therefore, better to just keep it all in the till to buy additional shares.
Disadvantages of Direct Purchase Plans and DRIPS
The disadvantages of direct purchase plans and DRIPs relate to taxes and the ability to buy or sell shares quickly.
With regard to taxes, you have to be organized enough to keep accurate records about the amount and the timing of your purchases and of your reinvested dividends. Even if a company does not distribute dividends to you and just reinvests those dividends to buy more shares for you, you will still owe taxes on the reinvestment amount. We won’t go through the specifics of the tax issues here, but you should understand that you have to keep proper records about the activities in your account to make it easier for either your parents or an accountant to help you with taxes.
Another disadvantage of direct purchase plans and DRIPs is that they are not for people who want to trade in and out of stocks quickly. For one thing, companies that offer such plans do not offer you the ability to buy or sell stocks whenever you would like. Some of these companies may buy or sell additional shares for their DRIP investors weekly, monthly, or even quarterly. This means that you may miss out on short-term movements of stock prices. This is not really a disadvantage for Teenvestors, since their investment goals should be for gains over the long term. If you do your research, you are likely to find companies that fit those goals.