When I was 18 I bought my first shares of stock. At the time I had a part time job and I would accumulate about $400 before running out to the local office of my brokerage house to make a purchase. This was back in the day (cough) before online investing was available to the regular person. And I had it in my head that this was special so I wanted to do this in person! But…
I paid too much in trade commissions
Yes I knew I was paying more for the trade than if I phoned it in. I thought I would make the money back. The stock price would go up and the dividend reinvestment would eventually continue to snowball the value of the holding.
Even on price increase alone in some cases that trade commission cost was almost the price of a whole share. So I needed the price of each stock rise maybe $8 before I broke even on that stock. When you’re talking about shares that cost maybe $40, it’s maybe a 20% increase. Sure that happens, but usually takes a lot of time.
Today this is generally less of an issue, if you choose your brokerage house wisely. The major houses generally charge $5 to $7 per trade (with some exceptions and check their fee schedules).
I didn’t buy enough shares to create a new reinvestment share in a reasonable amount of time
I didn’t think to do the math. I didn’t check how much I would receive in terms of a dividend per quarter on 3-5 shares of stock. And then how much that dividend would potentially turn into when it comes to converting to shares.
For example: 4 shares of a stock that paid $0.20 per share per quarter means a $.80 quarterly payment. If the stock was worth $40 at the time, I might get a partial share of .02 . Yes, actually that tiny. So per year maybe I’ll have less than a tenth of a share. So that means in maybe 10 years to get to one new share!
When you move stock between brokerage houses, they liquidate the partial shares
I kept my stock at the one brokerage house for a few years before they decided to focus on larger accounts (i.e. they started charging annual account fees for accounts under a certain value). Their target account value, which I don’t remember, was larger than anything I could put together within a year or two. I hate paying account fees so on principle I moved the accounts.
When brokerage houses transfer stock they transfer the full shares, liquidating the partial shares. So all of my patience of waiting to grow my tiny partial shares was completely wiped out. It was cheaper to transfer the shares than sell them, even though they were underwater (worth less than what I paid).
The other gotcha on this: a tax event. Those tiny shares counted as a stock sale so it was reported to the IRS and I had to report them on my next tax return. YEAY, more paperwork I didn’t expect.
You have to pay taxes on dividends each year (if it’s in a non-IRA account)
I’m not sure how I missed this but I thought if I reinvested the dividend then I wouldn’t have to pay extra taxes until I sold the shares. Nope, not so much.
The actual tax rate depends on what type of stock it is, and how long you’ve held it. You may have noticed on your 1040 a couple of boxes about qualified and ordinary dividends. The qualified dividends are taxed at a lower rate than ordinary, which are taxed at your regular income tax rate. Check with the IRS or your favorite tax professional for more information on this.
Granted, this part won’t stop me from buying stock in a non-IRA account. This is more of an FYI.
Fast forward to today
I think I bought 5 or 6 different stocks at the time. 2 of which I actually still have and have since added to. The others were less than spectacular. I held them for years before finally giving up and selling them mostly at a loss. Maybe if I held them another 8+ years I would have finally made money on them.
Ultimately it was a good learning experience and I have to admit that when I made my first restart at stock investing 4 years ago I did something similar where I purchased in blocks of $500. Again it was unlikely that I would make a huge profit, but it was enough to help me put my toes into the investing waters and get a little more comfortable with the idea. At least this time the commission fees were much less so the stock price didn’t need to rise as much to cover my costs.