Friday, August 15, 2008

"No Money"? No Problem

I wish I had come up with ShareBuilder.

If you visit financial Web sites, you've probably seen ads for this outfit, which offers to let you buy stock for $4. I have no doubt ShareBuilder is honest and capable of delivering every service it offers. But they do leave out a very important detail: Investors don't need to pay anything for the services ShareBuilder provides. They're available for free.

The $4 fee is not only a ripoff, but it's substantially higher than what you'd pay an actual broker. And an actual broker can actually execute a trade. ShareBuilder can't. (Its owner, ING, can, but for more money) Sharebuilder can help you buy and sell stock, sure, but it uses an alternative to the traditional stock excahnges.

We all know that billions of shares are traded each day on the Big Board and the Nasdaq. But a handful of other companies traffic in stocks, albeit an relatively eensy volume. They're called "transfer agents."

A public company might have millions or even billions of shares. Each share carries a vote. When the company has an issue that shareholders must decide -- like electing the board of directors -- it's critical that the vote is fair and accurate. (Admittedly, I've never seen the need for this in elections myself, but that's another story for another day.)

So, anyway, the company uses the services of a transfer agent to keep track of who owns the shares at any given moment. And as part of the service package that a transfer agent will offer a public corporation, many manage something called a direct-purchase plan. These plans were originally created by public utilities, to let customers buy stock a little at a time, in small amounts, often fractions of shares at a time. Over the years, these accounts caught on. And you can see why: Socking away a few bucks at a time is an easy way to build a tidy nest egg -- something to help fund retirement, say, or get the kids through college. Some of these plans can be started for as little as $100.

(One of my most successful investments, on a percentage basis, was in one of these plans. I started the account with a hundred bucks to show a coworker how easy the plans were. I funded the initial deposit and put maybe $50 in a month later to show my colleague how to do it. Then I forgot all about the whole thing. After a few years, I got a statement in the mail and discovered I'd tripled my money. I blew it on cigars. I still don't have the slightest clue what that company actually did.)

These plans are why I don't buy it when I hear someone say they don't have enough money to invest in the market. Bullshit. They totally do. They might not be able to buy a round lot of Monsanto, but they can buy a few dollars' worth at a time. And time, as I believe has been noted elsewhere, is money.

But wait. There's more. The niftiest thing about these plans is the dividend option. Companies that pay a dividend will usually allow direct-purchase plan participants to choose how they want their dividends paid -- either in cash or in additional shares of stock. The dividend election option is a great way for an individual investor of modest means to build significant wealth over time -- and never pay a dime in fees or commissions. Most plans will even save you a stamp and draft the cash right out of your checking account.

That's why ShareBuilder is both a genius business and a complete ripoff at the same time.

Say you use this service to help you invest $50 a month. In the course of a year, you'll pay $48 in fees -- 8.7% of the $552 that will make it into your account. It doesn't seem like much, but it adds up to thousands in not very many years. That's a complete waste: You can set up a direct-purchase plan for free on most transfer agents' Web sites in less than 15 minutes.

If you and your spouse each were to put just $125 a month each into a direct stock-purchase plan that delivered an annual return of 12%, you'd have $125,000 in fifteen years -- triple your contribution. A more significant allocation -- say $500 a month -- is even more dramatic. And best of all, these plans take no effort, no brains and no discipline. Smart investors even use them to "time" the market, buying more heavily when share prices are low than when they are relatively higher. (You typcially buy at a monthly average price, not the current real-time market price.)

Most of these plans can be used to set up a Uniform Gift to Minor account, which is handy to plan for a child's college education. After 18 years of $500 monthly contributions, your son or daughter could elect to take the 12% dividend in cash, which at that point would be roughly $45,000 a year. Why pay for college yourself when Johnson & Johnson or Philip Morris can take care of it?

Smoke 'em if you got 'em. Have a great weekend.

You can check out these plans here.

1 comment:

The Godfather said...

Love the Philip Morris reference! Smoke 'em if you got 'em, indeed!