By Andrew Horowitz

This week, I wanted to dedicate the whole episode to answering a question from listener Robert B. on how to get started buying stocks in a new portfolio when you don't have much money. For that great question Robert is going to receive a copy of my book, The Disciplined Investor – Essential Strategies for Success.

Can You be an Active Investor with a Small Amount of Money?

Here's a portion of his question, which is a common question I get all the time, and might be a question that's on your mind too but are just too afraid to ask.

Robert writes, "I have a regular investment plan of $100 which goes into a "Sharebuilder" account. The transaction cost to buy shares is only about $4.00 so it made sense to me to start like this as I have no significant capital to start with.

Although I can buy and sell, I have avoided doing so as the transaction costs would mount on a very small pot of money.

Do you have tips or advice for small-time investors like me who are slowly trying to build a portfolio and have not yet reached an "economy of scale" where the transaction costs do not make up the significant amount of the purchase?

In other words, is there a way to become more active in the market without huge costs?

What is Sharebuilder?

Great question, Robert.

I’ll start answering your question by first explaining what sharebuilder is for those who might not know. Sharebuilder is a type of service where you can purchase shares of a company for a transaction cost or commission of $4.  It may sound strange, but you can only purchase stocks on Tuesday--so one day per week--but it teaches a disciplined version of what they call “automatic” investing.

You can set up a schedule in your account where you can put a certain amount of money-- perhaps $100 per month every month--into buying shares of companies you want to own for the long term.  This type of service is geared towards long-term investors instead of traders; so you'll only want to use these types of services if you plan to invest in a company for the long haul but don't want to pay the $10 or more commissions that most online brokers will charge you each time you buy and sell shares of stocks.

You can find more information at the website www.sharebuilder.com on how you select your investment and investment schedule. After you sign up you can start depositing money into your account to buy the stocks you have chosen on the schedule you have planned. 

What are DRIPs?

There is another inexpensive way you can invest in a stock for the long term and it has sort of a funny name.  It's called DRIP and you can almost imagine your money drip, drip, dripping into your investment account over time. 
There is another inexpensive way you can invest in a stock for the long term and it has sort of a funny name.  It's called DRIP and you can almost imagine your money drip, drip, dripping into your investment account over time.

DRIP stands for dividend reinvestment plan, and most people don't even know these types of programs exist.  In almost all cases when you enroll in a DRIP program you can purchase shares of a company for free, because you are buying the shares directly from that company.

Large companies offer dividend reinvestment plans directly, so you'll need to visit a company’s webpage or contact the investment department of the company you wish to invest in.

How to Invest with DRIPS

For all their advantages, DRIPs might be one of the best solutions for small investors wanting to purchase stock for the long-term.  All dividends that you accumulate in your account are automatically reinvested without a fee, and you can purchase fractional ownership of stocks.  For example, whatever money you are paid in a dividend for the quarter is directly re-invested into the company's stock, and you might wind up purchasing 10 and a half more shares or some other fraction of a share that you own.

Each company will have different rules on how to participate in the reinvestment plans, and some will charge an annual fee of around $30 whereas others might not have an annual cost. 

You'll need to do research to figure out what companies you want to invest in first, and then you can find out if those particular companies offer DRIP programs and how you can join them.

What you'll benefit from doing that extra work is a never-ending stream of transaction-free small re-investments each time the company pays you a dividend.

The bad news is that some stocks don't offer dividends at all, such as many technology stocks like Google or Apple.  Many small stocks also don't offer dividends.  Wal-Mart is an example of a stock that does offer a DRIP program.

How to Learn More About DRIPS

One website that offers education and more information on DRIPs is the website DRIP Advisor, which is located at www.dripadvisor.com.  You can also learn about DRIPs on Investopedia.com.

If you do find a stock that you want to buy from a company that offers dividends and a DRIP program, it might be a good idea to join that program to avoid transaction costs while continuing to build your growing portfolio over the years.

Feel free to send in your questions, and we'll try to get it answered on the show!

Keep with us as we discuss even more ways to become a winning investor in our next podcast! If there’s a question you’d really like to ask, just email me at winninginvestor@quickanddirtytips.com  maybe your question will appear on the show.

And if you like the show, tell a friend or leave a review on iTunes. Until next time, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Making Money in Any Market  wishing you all the best on your quest to investment success.