Sunday, December 19, 2010

Shareholder Investment Plans

One way to buy stocks without going through a brokerage or a mutual fund is through Shareholder or Employee Investment Plans.  Are these a good deal?  They can be, for the " buy and hold"  investor.

One way I got started investing in stocks was through the shareholder investment plan.  The magazine The Money Paper.  The technique is simple:  You buy one share of a company and hold that certificate physically.  You can frame it and put it on the wall, if you want.  As a "shareholder" of that company, you are entitled to participate in the company's shareholder investment plan.  Not all companies have this plan, so figure out first if they do, before you buy a stock.  The Money Paper link has more information in this regard.

The Shareholder services plan will send you quarterly or monthly reports, showing how much your stock is worth and how much you have invested.  Usually, there is a detachable coupon allowing you to buy more stock in the company, or sell part or all of your investment.  In addition, you can, in some instances, set up an automatic draft of $50 or more from your checking account to buy shares every month.  The service fee for purchases is usually $1 or so, which is far less than the $9.99 charged by the discount brokerages.

It is a good way for the small investor to get started in investing, as you can buy stocks over time, on an installment scheme, and also take advantage of cost averaging.  Some of your shares will be bought at a high price, others at a low one, but overall, you tend to do better than people who try to "time" the market.

Computershare is a company that administers a lot of these plans, and if you have one or more accounts through shareholder services that are administered by Computershare, you can log into their website and monitor them all, just as you would a brokerage account through E*Trade or Ameritrade.  You can buy and sell stocks through these accounts, although some fees do apply, particularly for selling shares ($35 to transfer to a bank account, so you'd better be selling a good number of shares).

The shareholder services (direct investing) approach to stock buying is best suited for companies that are long-term 'keeper' stocks, not things you are going to buy and flip in the short haul (which are bad deals usually, anyway).  So a stock like Stanley Black & Decker, which has a fairly consistent stock price and churns out dividends regularly, might be a good candidate for direct investment, whereas the latest hot tech stock might not be.

Why do companies participate in these plans?  Well, if you have a group of investors buying shares regularly, it tends to stabilize the stock price, as despite market peaks and valleys, every 5th of the month, these shareholders are slated to buy a few dollars each, of your stock.  So the company share price is more stable and less prone to market disruption.

For the consumer, it is a good way to get started in investing, for as little as $50 a month.  And it acts as a forced investment scheme.  If you participate in a stock for $50 a month, by the end of the year, you will own $600 of that stock, at the end of the decade, $6000 - possibly much more.  And as you make more money in life, if you get in the habit of adding more to these plans, you might build up a nice little portfolio of stocks in a few years, without a lot of heavy lifting.

At one time, I was investing about $400 a month in these types of plans.  I had to sell some of these stocks to get through some hard times, but others I managed to keep.  Yet others, I transferred to E*Trade or Ameritrade accounts.  Now that I am debt-free again, I am using my Compuserve account to buy more shares in some of these stocks for the long haul.  And who knows, I may end up going back to putting  $50 or $100 a month away into stocks like this as well.

If you are looking to get started in investing, shareholder service plans are a good first step for the novice and small investor.  Start out small and see where it goes, and then work your way up.