Stock Market

Most corporations offer a handy service known as a Dividend Reinvestment Program, or DRIP for short. DRIPs are the best way for you to build a position in a company at a very low cost over a long period of time. Advantages of these programs include:

In most cases, there is little or no fee for shares purchased through a DRIP. This lowers your cost basis and can increase your returns substantially over long periods of time.

You can purchase additional shares of stock directly by sending in a check or having funds withdrawn from your checking/savings account. Most of the time, additional investments can be as small as $10 or $25.

You can establish automatic, regular withdrawals from your bank account to purchase shares. This is an easy way to establish a dollar cost averaging program.

Fractional shares can be purchased. Say you receive $15 in dividends yet the current stock price is $50. Through a DRIP program, you will actually be able to purchase 0.3 shares. This isn't possible through a broker.

Want to know how to get started? First, check and see if the stock you fancy offers a DRIP. You can either find the phone number for the investor relations department on the company's web site or head over to www.equiserve.com.

Next, buy a single share through your broker and then request that he send you a stock certificate; you can also order a single certificate through a special gift service such as OneShare.com. This makes you eligible for participation.

Finally, fill out and mail in the paperwork provided to you by the investor relations department or Equiserve.

Viola! You've done it! Sit back and relax. Without any additional work, the amount of shares you own will increase as your dividends are reinvested.

Stock Splits

A lot of novice investors make the mistake of thinking that when a stock splits, it's good for their portfolio. Really, it has no effect whatsoever! It's the financial equivalent of getting two $10 bills in exchange for the $20 you have in your pocket. Don't believe us? An example may help.

The Missouri Tea Company has 100,000 shares outstanding, each trading at $30; giving the business a market capitalization of $3.0 million. Last year, MTC had a net income of $250,000, or $2.50 per share.

The Board of Directors declares a 2-1 stock split because it thinks that $30 per share is too expensive for the average investor. It turns on the printing presses and prints an extra 100,000 shares. It then distributes them pro-rata to the existing shareholders (for example, if you owned 100 shares, you would receive 100 shares of the newly created stock).

The result is that the shareholders now hold twice as many shares. But notice that the entire company is still the same size! The $250,000 profit is being split by 200,000 shares instead of the 100,000 that existed previously, cutting the EPS in half to $1.25. The result is that the stock pricewhich was $30 per sharegets cut in half to $15 per share.

So which would you rather have ... 100 shares at $30 each generating $2.50 per share in profit, or 200 shares at $15 each generating $1.25 per share in profit? At the end of the day, you are still in the exact same economic position.