New York - A DRIP allows individuals to bypass stockbrokers and avoid paying commissions by purchasing shares directly from participating companies via a Dividend Re-Investment Program or "DRIP." More than 200 well known U.S. and foreign companies, including Merck, Exxon, Gillette and Home Depot offers DRIPs.
It generally costs less to buy stocks using DRIPs as opposed to using a brokerage account. Investors can generally invest small amounts (i.e., $200 per company) and are charged only nominal transaction fees (i.e, $5 to $10) as compared to discount brokerage fees of approximately $35 to $50. DRIPs provide a method for investors to accumulate a diversified portfolio of individual stocks.
However, it may cost more to sell stocks using DRIPS and it is difficult to obtain immediate access to cash when you need to sell. Because companies use DRIP plans to attract long-term investors as opposed to stock speculators or traders, the plans generally have restrictions or limitations on purchases and sales. For examples, should you need to sell your stocks, companies generally allow sales during predefined periods (i.e., month end or quarterly). In addition, once a sale is executed, it generally takes 2 to 4 weeks to receive a check.
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