Most stocks cost odd amounts: $3.25, $18.63, or $101.88. Traditionally, you invest by buying a whole number of shares, and the cost is the number you buy multiplied by the price.
"Dollar-based" investing is different: it means buying stocks or other investments in a dollar amount you choose, instead of in multiples of the stock price. Let’s say you decide to invest $50 or $200 a month; your investment doesn’t normally buy an exact whole number of shares. It’s a great idea for the ordinary investor who wants to put away consistent amounts for the long term.
To see how the two systems work, put yourself in the handcrafted shoes of a wealthy imaginary relative, Mr. Buck.
Let’s say Mr. Buck is worth $10 million. Perhaps he employs a professional broker, or perhaps he does all his own investing through an online brokerage account. In any case, his typical investing experience might look something like this.
"Say. That bond I’d forgotten all about has just matured. Suddenly I have $10,000 sitting in my checking account, and I really should invest it in something. Hmmm. I notice that shares in Global Widget have declined recently. But I’m confident the price will recover, and then some. Let’s see… at today’s share price of $126.99, that $10,000 will get me 78 shares."
With a call or a click, it’s done. Mr. Buck now owns 78 shares in Global Widget. The transaction even leaves enough loose change for lunch at an expensive restaurant – if we ignore the $200 or so in commission that his personal broker may have just pocketed.
Let’s get back to the real world – because there are two features of this rosy, cigars-and-cognac scenario that aren’t real for most investors. First, it’s a one-time event triggered by a windfall – and most ordinary investors want to put away a small amount of money regularly. Second, of course, is that word small.
Suppose you decide to save $50 a month, every month, and you want to put those savings directly into the stock market. Global Widget is a solid company, with good management and a great record of consistent growth – it looks like an excellent long-term investment. But.
The problem’s obvious. You can’t buy into it at all, because (at a current price of $126.99 per share) even a single share will set you back more than double your monthly saving.
Sure, you could save up for ten weeks, and then buy one share. But that’s not a practical idea. First, you’ll have to keep the money somewhere as you save it, and it won’t be growing much either under the mattress or in your checking account. Second, you’ll have to keep watching the price, and the only certain thing about the future price is that it will change.
What you want is a service that traditional brokers – even online "discount brokers" – don’t provide. The ability to buy part of a share. The ability to put in that small amount of money on a regular basis. Ignore the current price, and know that you are accumulating whatever shares and fractions of a share the chosen amount will buy.
A ShareBuilder Account is designed to let you do just that… and more.
For instance, some people don’t like mutual funds, because the investment gets spread around in an ever-changing pool of companies and you never quite know where your money is. Also, mutual funds often have a variety of relatively high costs: management fees, sales or redemption charges, distribution fees, capital gains from ongoing portfolio turnover, etc. With a ShareBuilder Account, no problem. If you set your account to buy only one stock – Global Widget – your monthly $50 (or whatever) buys just that company. If you also want to invest in MiracleDrug, PrettyNiceCompany, and BigBank, then the money is automatically split between the four stocks.
Maybe this month your $50 will buy a tenth of a share in Global Widget, three eighths of a share in MiracleDrug, and five sixty-fourths of a share each in PrettyNiceCompany and BigBank. The details don’t matter, what matters is that you were able to invest the dollar amount that you chose, on a regular schedule, in the companies you believe in.
Congratulations. You just created your own ShareBuilder Plan. And, while you may not have the range of diversity or professional management characteristic of a mutual fund, you have exactly the stocks you wanted.
Need to sell some stock to cover an unexpected expense? No problem. Sell orders occur in real time and are competitively priced. All you have to do is decide how many shares to sell to cover your needs.