etting started in stocks can be tough. It's costly, too, to set up an account at a brokerage house and to buy substantial amounts of the dozen or so different stocks needed to provide a diversified portfolio.

That's why Mike Schindler decided to start small with a plan that allowed him to buy stock directly from each company for just a few dollars a month. This plan allowed him to diversify his portfolio into several different companies at minimal cost.

The tool Schindler uses - a dividend reinvestment plan, or DRIP - has changed a great deal since he began using it in 1990. Many more companies - about 1,200 now - offer them, for one thing. Newsletters, Web sites and other investor services are available to help investors navigate this market, for another. DRIPs are now augmented by a companion version known as direct stock purchase plans, or DSPs.

While DRIPs allow you to buy stock directly from the companies after initially buying your first share typically through a broker, DSPs allow you to buy your first share directly from the company if you agree to continue buying shares or fractions of shares on a regular monthly basis.

But both systems come at a price.

DRIPs are not the same low-cost tools that Schindler used when he got started. Today, many investors pay a fee to enroll with each company as well as a transaction fee that can amount to 10 percent of their investment, erasing much of the advantage Schindler has enjoyed.

DRIPs remain a good tool for small investors trying to get a toehold in the stock market. But today they must be analyzed carefully - and compared with the costs of a discount brokerage account - to make certain they still offer an advantage. "When I started, there were not as many options," Schindler says. "Discount brokers have eliminated much of the advantage of DRIPs."

Dividend reinvestment plans date back to the mid-1960s, according to Vita Nelson, editor of The Moneypaper, a newsletter, and The Guide to Dividend Reinvestment Plans. AT&T was one of the first companies to put a DRIP in place. "Companies were issuing dividends to shareholders and they wanted to reinvest them as a service to their shareholders and employees," Nelson says.

Initially, DRIPs were restricted to shareholders, employees and customers, he says. But it didn't take long for creative investors to figure out they could become shareholders of their favorite companies by buying just one share of stock. Once a shareholder, an investor can build up a nice holding in a company by sending in small amounts of money - like $50 - once a month over many years. The company buys fractional shares for the account. And the dividends, of course, are reinvested. The stock must be held in the individual investor's name.

Nelson first heard about the plans in 1984 and began writing about them for The Moneypaper, offering advice on how to use them. Eventually she began to offer readers a service to get them started: Her company would buy that first share of stock and get it registered in the investor's name for a $15 fee.

Some companies offer safekeeping of the initial share. For those who don't, Nelson's company also offers to redeem that share once the investor is enrolled in the program.

Investors who want to use a DRIP can buy a single share of stock from a broker. Charles Carlson, editor of the DRIP Investor, and author of Buying Stocks Without a Broker, recommends Kennedy, Cabot & Co. to buy the first share at a good price. Investors also can use One Share of Stock Inc. at a current price of $40.50.

A DSP program offers an advantage over DRIPs in this regard. You deal directly with the company, bypassing the brokerage fees. But there are less than 500 companies that offer DRIPs, according to Netstock Direct, a Web site devoted to DSPs and DRIPs.

Both DRIPs and DSPs are good for companies, Carlson notes, because shareholders make loyal customers. They can also be allies in a hostile takeover. Not surprisingly, then, over the past couple of years, more than 200 companies have agreed to sell shares directly to investors who are not yet shareholders.

Carlson calls the direct programs "no-load stock purchase plans." Some of them are pretty good deals, indeed. For example, Exxon Corp. charges investors nothing in its DRIP. There is no enrollment fee and no transaction fee. There is, however, a fee to sell the stock.

But many of the companies that have "gone direct" have added substantial enrollment fees and transaction fees to the programs that Nelson believes have ruined them for small investors. "We popularized these programs and then the bank transfer agents said, 'Oh what a good idea,'" Nelson says. "They talked companies into adding direct programs that have ruined the plans."

Many companies - like Disney, for example - have added minimum investments. Disney canceled its plan in 1990. When it was reinstated, the program required a minimum of $1,000, or $100 a month.

Bristol Myers Squibb charges 4 percent of the regular investments (which are referred to as optional cash payments) up to $25, as well as 4 percent of dividends reinvested up to $5. And IBM Corp. carries a fee of $5 to enroll in the program and $5 per transaction, Nelson says. "So if a small investor is putting in $50 a month, that's 10 percent of his investment," she says. "They're better off not to use IBM. It's better to invest in Intel instead."

Indeed, Nelson recommends that investors not use companies that charge fees and to look, instead, for another company in the same industry. So when Mattel added fees to its program, she advised investors to sell Mattel and buy Hasbro.

Still, Richard Moroney, editor of the Dow Theory Forecast, a sister publication of the DRIP Investor, points out that some of the stocks provide an excellent opportunity for beginners, especially if they don't charge additional fees or loads. "It runs all over the map," Moroney says. "There are quite a few that don't have any fees at all. Many charge to get in. But there are no fees to sell or reinvest dividends."

For example, a number of stocks on Moroney's recommended list have no-load stock plans. Three of the best ones, he says, are Bell South, Questar, a natural-gas utility, and Exxon. Exxon has no fees. The other two have a $10 enrollment fee but no purchase fees.

DRIPs have other drawbacks, too. The company buys the shares for investors in the plan on a particular day each month. It might be the first business day or the 15th of the month. Schindler says he's noticed that he often pays the monthly high for his shares, perhaps because the large purchase of DRIP shares causes a price spike.

That means investors have no control over exactly when to buy or sell their shares. So there is no opportunity to get the best price. That makes the plans best for long-term buy-and-hold investors. "If you want to make the decision on when to buy and sell, DRIPS are not for you," Moroney says.

DRIPs provide a tax pitfall as well. The reinvested dividends throw off taxable income. So even though you don't receive it, you must pay tax. Schindler doesn't mind that. "I've paid the taxes over the years and I'm still happy with my account balances," he says.

And they offer a record-keeping challenge. You must keep track of your cost basis - or your cost plus reinvested dividends - for tax purposes. It can be done, says Carlson, who has written about the technique.

Still, DRIPs don't make sense for investors with a substantial sum to start. "Don't be pennywise and pound foolish," Moroney says. "If you have $10,000 lying around and you're not afraid to put it in to Merck all at once, you're better off doing that."

Some companies provide discounts of 3 percent to 5 percent - or even up to 10 percent - on stock through DRIPs. But, of course, that's not always a bargain. Nelson puts companies offering discounts into two camps: The first is troubled companies trying to attract capital. The second is good companies trying to help their shareholders. Quite a difference!

The bottom line? DRIPs are not a one-size-fits-all solution. "To limit yourself to the 900 companies with DRIPs or the 300 with direct purchase is a mistake," Moroney says. You should think first about your goals, your time horizon and the type of portfolio you want to set up. "Focus on the company fundamentals first," he says.

Then, if you're a small investor, it's smart to see if any of the stocks you plan to buy are offered in a company reinvestment plan. "Start with what you want to buy," Moroney says, "and then think about what's the best way for you to buy them."