Setting your limits

Q: When you get to 100 shares in a company, should the automatic deposit be stopped? And is it better to put $1,000 in a company and let it ride or continue to make automatic deposits?
– W. Amaker
Columbia, South Carolina

A: This is a common quandary investors face when they own individual stocks through a dividend reinvestment plan (DRIP) or direct stock purchase plan (DSP). First, identify what your investment objectives are. If you’re plowing money into securities to meet a specific goal like retirement, you should have as diversified a portfolio as possible to protect yourself against market volatility.

For investors of modest means, it’s easier to reach the $1,000 milestone. This lets you invest in a larger basket of stocks in a shorter period of time. Also, you can own $1,000 worth of AT&T (NYSE: T) faster than 100 shares. For example, if AT&T stock were trading at $15 or $30 a share, it would cost $1,500 or $3,000, respectively, to purchase 100 shares, which is more than the $1,000 you originally budgeted for.

But to reach 100 shares in, say, IBM Corp. (NYSE: IBM), be prepared to either shovel in more cash or to invest set amounts over a longer period of time. You will reach your goal faster if a stock split occurs, since you’ll be getting more shares.

Once you’ve reached your 100-share or $1,000 limit, reevaluate your portfolio and your goal. If owning, say, two dozen stocks in various industries will help you retire at a certain income level, fine. But if you need more cash, keep plowing the money in. The more you invest over time, the greater your returns.

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