This Monthly Investment Plan (MIP) was created by members of the New York Stock Exchange for those who wished to buy common stocks on an installment basis. Now investors have the ability to make monthly stock purchases.
The Monthly Investment Plan offers the modest investor many benefits. For instance, it makes available to him a system called "dollar cost averaging," which is simply the investment of a certain sum in the same stock at regular intervals, and it enables the investor to capitalize on price fluctuations instead of worrying about them. The method works because you buy more shares of your stock with the fixed amount of money when the stock drops in price than you do when it is comparatively high, and when the stock rises again you make a profit on the greater number of shares you got at the lower prices.
For example: Leaving commission charges out of the picture for the moment, suppose you decide to invest $100 every three months. Let's say the stock you pick sells at $20 when you start; you get five shares. Three months later, the price had gone up to $25; this time your $100 buys four shares. You now own nine shares and you have spent $200. The average price in the two transactions was $22.50, but the average cost per share to you is only $22.22. Over a long period of time this difference between average price and average cost on a number of shares can amount to a good deal of money, and as long as you ultimately sell at a price above your average cost, dollar averaging can make money for you no matter how the price of your stock goes up or down.
Under the Monthly Investment Plan, which operates on the principle of dollar averaging, you can invest as little as $40 every three months or as much as $999 every month or any amount in between. You merely send to your broker the sum you decide on, and he buys for you the stock you select. You pay only the standard commission any other investor pays. There are no fees, dues, assessments, interest charges, or other costs. You may miss a payment and your plan will still be in force; and you may terminate it at any time without penalty.
Critics of the Plan object to the fact that the purchaser will pay a somewhat higher commission when buying a share at a time, or perhaps a very few shares. This is, of course, true; but whenever anything is bought on pay-spreading arrangement it always costs more, whether it be a piano, a new automobile, a suit of clothes, or even a share of stock! Many say that they are willing to pay the slightly higher commission because of the convenience of the "pay-as-you-go" feature of the Plan; besides, many state that they are buying for future capital gains, rather than just income, so that they expect the long-term increase in value to offset the com–mission charges.
The Monthly Investment Plan also has an–other advantage. It makes it possible for the investor to buy parts of shares, just as a modern gasoline pump allows you to buy fractional gallons when you drive up to a service station and simply ask for "three dollars' worth." Fractional shares of stock are always figured to the fourth decimal place. Dividends are figured the same way. It is surprising how rapidly these fractions add up to whole shares.
Finally, under MIP, dividends can be automatically reinvested, and this means that your total investment grows more rapidly. Plus, you are automatically accumulating more money in your investment account all the time, so without having to think too hard about it you are investing in your future.