An automatic investment plan (AIP) is a way for investors to buy stocks on a recurring basis with small amounts of money. The funds to pay for these investments are automatically deducted from a checking or savings account of the investor.
There are many different types of automated plans that investors can choose from. For example, many direct stock purchase plans offer automatic investment plans as well as some online discount brokers like ING ShareBuilder. There are also brokers that allow investors to setup these types of recurring investments into mutual funds and other products.
Advantages of Automatic Investment Plans
Buying stock through an automatic investment plan has several advantages, especially for the small investor.
Dollar Cost Averaging – Investing through an AIP will help investors dollar cost average into a stock. This ensures the investor will not overpay to own a stock if they make a onetime purchase. Instead, the investor can spread their investment out over several months or years which ensures they will pay a fair market price.
Small Investments – As a small investor myself, I don’t usually have a couple extra thousand dollars to invest. However, I typically have an extra $50 or $100 around which is perfect for an AIP. Three of my current holdings (CLX, CINF, and LOW) were purchased through an automatic investment plan.
No Commissions – Some automatic investment plans do not charge commissions to invest. For example, I have an AIP through the Clorox direct stock purchase plan and do not pay any commission, which saves me a lot of money. Each month I invest $50 and none of it goes to paying a stock broker.
Hands Off Investing – Setting up an automatic investment plan saves lots of time for the average investor. As long as you have the funds in your checking or savings account, each month you will make an investment without any time spent. Investors should still keep tabs on their holdings, but the automated approach makes investing much easier.