When you buy stock, most of the time you have to buy a whole share. And most of the time, you have to pay fees and commissions each time you buy. If you've only got $100 to spend, this can significantly affect your investment options. Enter the dividend reinvestment plan, or DRIP. DRIPs automatically invest your dividends in new shares of stock, even fractions if you can't afford a whole share. This is a great way to painlessly build up your investment portfolio, especially when you're starting small.
Decide what stocks you want to buy and investigate their DRIPs. DRIPs are generally company driven, rather than brokerage driven, and every company makes its own rules. You can find information on DRIPs on company websites under "Investor Relations."
Buy a share of stock. In most cases, you only need to purchase one whole share of stock to enroll in a DRIP, but some companies may require more. You must make the purchase directly through the program or transfer the shares from your brokerage firm, as the shares must be registered in your name.
Complete paperwork to enroll in the DRIP. This paperwork varies from company to company and in some cases you may be able to register online. If you cannot find the applications, call the company's investor relations department or look for its transfer agent.
Monitor your accounts. Once you've completed the paperwork and sent it in, keep an eye on your DRIPs to ensure that all is working as planned.
Tips
Some companies also offer direct purchase programs that allow dollar-value purchases, rather than whole-share purchases. As with DRIPs, these plans let you hold fractional shares and build investments slowly. In most cases, you can direct invest through the same account as your DRIP. In addition, more and more online brokerage firms, such as ShareBuilder and TD Ameritrade, offer similar, low-cost dollar-value programs.
Warnings
While most DRIPs are free or very low cost, some do charge a fee for reinvestment. If you do not hold a lot of shares, this can be costly. Make sure to understand all fees and restrictions before investing.